Research On The Influence Of Internal Controls Defect On The Sensitivity Between The Executives’ Pay And Corporate Performance

The design mechanism of executive compensation incentive system has been a hot topic in the theorists, practitioners and regulators. After the outbreak of the global financial crisis, the pay of senior management staff has aroused public concern. While shareholder dividends were "poor", executive compensation fatten rate increased dramatically, indicating that part of the company executive’s salary did not match the performance of the company. The principal-agent problem can be solved by the way of constructing the salary contract in order to reach mutual benefit state. However compensation chaos in recent years showed that the theoretical analysis had deviated from long-term existed practice of domestic and foreign practitioners, even some areas appear contrary to the situation. What are the reasons that lead to the reality of the salary chaos?At present, the domestic and foreign scholars’ research on executive compensation mainly concentrated on the influence factors of salary level and structure of corporate governance on executive pay performance sensitivity. This paper is from internal control research angle to explain the salary chaos and declining the sensitivity between performance and salary and enrich the academic study of the fundamental reason of these problems. When the internal control has deficiencies, what influence will reflect on the sensitivity between corporate performance and managers’ salaries. Based on the data of Shanghai stock exchange and Shenzhen stock exchange in 2013-2014, this paper uses descriptive statistics, correlation analysis, linear regression to investigate the influence of internal control deficiency to the sensitivity between executive compensation and corporate performance. It is found that there is a sensitivity between executive compensation and corporate performance, and there is a negative significant correlation between internal control and executive compensation performance sensitivity.Empirical results confirmed the theoretical analysis point of view, more internal control defect means lower internal control quality, on the one hand, it cannot supervise the role of and management in company’s normal production and operation and were not able to supervise self-interest behavior of management. Executives will still take advantage of their rights and status pursuing maximizing their own interests, thus violating shareholders rights and interests. Poor internal control environment will reduce the opportunity cost of executives self-interest behavior. Then the power link between their compensation and corporate performance will weaken then. On the other hand, the quality of accounting information affects the sensitivity of executive compensation performance, and the effectiveness of internal control is the impact of accounting information quality, so the internal control effectiveness of executive compensation performance sensitivity. When internal control is effective, then the quality of enterprise accounting information is improved as well as the sensitivity. When internal control of enterprises is defective, the the quality of accounting information is reduced as well as correlation between executive compensation and company performance.According to the above research, this paper puts forward the following suggestions:firstly, enhance the internal control construction; Secondly, improve the internal control information disclosure level; Finally, make full use of executive compensation incentive effect in the design of executive compensation...