State-owned Enterprises-executive Pay, Internal Control And Corporate Performance

Senior management personnel salary system has been always one of the key points in the corporate governance. Executive compensation is not only the compensation offered by the shareholders, which means the compensation given by the clients according to the management performance of the agent, but also an effective means to motivate the agents’behavior and reduce the agency cost as well for clients.According to the relationship between compensation and corporate performance, There is a significant positive correlation between executive compensation and corporate performance in the early period of the international perspective. However, in recent years, more and more studies have found that the correlation between executive compensation and corporate performance is not that significant as thought before. When to explore the deep reasons for this, one of the most important factors is the existence of "insider control" phenomenon, the lack of internal control mechanism has further weakened the correlation between pay and performance for the agents. Therefore, effective internal control can be conducive to the good practice of the salary system.In view of this, some scholars have found that the sounder the company’s internal control mechanism being established, the closer of the pay and performance of its managers are linked, which obviously shows a higher pay performance sensitivity. However, the research finished by these scholars only shows the internal control is the key point to make the pay and performance closely linked for the executive managers, which did not explore the different salary system in the background, the impact of company’s internal control on managers’ performance would be also different. When the compensation system is considered being controlled by different factors, the strong internal control is likely to be different from the traditional theory of cognition-the internal control will be no longer conducive to enhance the relevance of pay performance.The executive managers’compensation in the state-owned enterprise is under control in a long time in China. In 2009, six ministries, including the Ministry of human resources and Social Security jointly issued "on further regulating the central enterprises responsible for salary management guidance" (hereinafter referred to as "salary limit order"),which made clear salary limit requirements for the senior management personnel of the central enterprises, requiring the salary of those managers should be limited to less than 600 thousand yuan a year. Since then, the government has repeatedly stressed the control mechanism of state-owned enterprises executive compensation, and the "one size fits all" has been put in practice in the senior executive pay system in the state-owned companies. Which obviously leads to a new phenomenon that the incentive effects of pay for performance is likely to be no more obvious with the background of strong compensation regulation for those companies. What has to be taken into consideration is that when the executives self-interest is strictly restrained by the internal control, the executives in these state-owned companies will possibly lose the enthusiasm to perform better with no more salary being offered.Consequently, what can be concluded is that, when the salary system is strongly controlled and the internal control is under a strict environment as well in the state-owned companies, executives can not achieve the incentive compatibility through the salary and perks at work. What will probably happen is that executives are likely to excess benefit through corruption, mergers and acquisitions. What is more, they can choose to perform not as well as before to go against the salary limit regulation, which can lead to a problem that the agency costs may be larger, the negative impact on the companies’ performance will be more serious.What can be taken into conclusion is that, the internal control in different compensation systems in the state-owned companies will lead to different implementation effects in different internal circumstances.which is to say, a strong incentive effect salary system in a good internal control environment will achieve a better incentive effect, and enterprise performance will be well benefited as a result of this regulation. However, when the salary system is in a strong internal control environment with many control factors will often make the compensation system lose excitation in the state-owned companies, and the enthusiasm of managers will be lost, which will certainly lead to the level of these managers’work performance will be negatively influenced by negative effects at last.In order to verify the above theoretical derivation, the signal transmission theory is used to study this problem in this paper. The internal control index disclosed in 2008 to 2013 Debo database are taken as the measure to judge the enterprise internal control quality. What is more, the grouping test regression analysis and paired sample test are used to study the sample companies. And the results are consistent with theoretical expectations given before:Under the background of compensation control, internal control is no longer conducive to improving the sensitivity of pay performance for the sample companies, the internal control and corporate performance is no longer in a positive correlation.The study of the state-owned enterprise executive pay help objectively understanding and evaluating the relationship between the system of state-owned enterprises in China’s current executive compensation and internal control, to perfect the internal control system and provides certain ideas and reference for building state-owned enterprises salary system. This paper research in the internal control theory based on studying the existing compensation system, integrated use of a variety of research methods, which is given priority to with theoretical research and empirical research.The main innovation and contribution in this paper can be concluded as follows:The mathematical model is used to analyze the relationship between the internal control, corporate executive pay for the companies with a new interpretation of the results given, which provides a new perspective for the study of internal control;Under the background of different pay system, the effects of the internal impact on the sensitivity of company performance and compensation performance are studied, and the mechanism of the internal control’s effects on the company’s performance and compensation system is also further studied.