An Empirical Study Of The Effect Of The Backgrounds Of Executives And Earnings Management On Executive Compensation In Private Enterprises

It has been a hot topic ever since executive compensation exists, especially its fairness and efficiency. Scholars at home and abroad have done deep and wide research on factors and consequences of executive compensation. Performance pay plans commonly practiced is the application of related theory results.Ever since the establishment of modern corporation system, ownership and management separates. Management behavior can not be supervised by the owner at a relatively low cost for that the owner is not involved in daily operations. Thus information asymmetry takes place between the owners and managers. Besides,managers and the owners as rational men pursue different utility functions. On such condition, managers probably take the risk of moral hazard behavior to seek their own interests. Performance pay plans get to set and employment in order to alleviate agency conflicts. However, the production of accounting performance results in that it can be easily manipulated. Managers are inclined to manipulate earnings to increase their performance pay. So it is meaningful to do research on the correlation of executive compensation and earnings management as well as the correlation of executive compensation and real surplus.Family businesses are an important part of private enterprises, which play an important role in capital market. Also family businesses themselves face urgent governance issues like imperfect system construction. Asymmetric altruism is the direct reason for the intensified agency conflicts in family businesses. Managers from family businesses grab a higher compensation than professional managers. Obviously,whether the manager is employed from the family business or not has an impact on his pay. Therefore, the effect of the background of manager on his pay is to beconsidered.This paper adopts operating profit as a substitution of earnings, then separates operating profit as three parts, namely, discretionary accruals and returns on investment and real surplus, to study the correlation of executive compensation and the three different parts of earnings. Furthermore, the effect of the background of executive on his pay is studied by introducing a dummy variable. This paper finds that there exists a significantly positive correlation between executive compensation and different parts of operating profit as well as the backgrounds of executives. When managers are from family businesses, they lessen earnings management activities.