Executive Compensation’s Contract Reference Point And Performance Sensitivity Research In SOEs Under Government Compensation Regulation

State-owned enterprises in China take the responsibility for economic development and maintaining social stability. Many executives of the State-owned enterprises are administrative appointed by the government, and they are the high administrative level of civil servants. Compensation of state-owned enterprises’ executives have been a concern of the society, because on one hand this regard relates to the effectiveness of state-owned enterprises’ compensation system, on the other hand it also reflects social sectors’ concern for social rich-poor divide and social equity. In recent years,the compensation gap between executives and ordinary workers of state-owned enterprises is growing, in order to form a reasonable income distribution between executives and workers and properly regulate the compensation gap between executives in different industries, government has issued a series of policies and measures, such as “the guidance on further regulating central enterprises’ compensation management”, “the scheme of central enterprises’ compensation system reforming”.The current academic research pays more attention to absolute executive compensation, and generally underestimates the psychological influence on the contracts’ results in signing the compensation contracts, such as loss aversion and reference point setting in the process. The contract theory regards contracts as the only reference point for the parties to judge benefit or loss in the trading relationship, and provides a benchmark to judge benefit or loss in the transaction. Based on the theory of Contract as a Reference Point, using China’s A-share listed companies from 2009 to 2014 as test samples, we select the industry average as a reference point to test the reference point effect of the executive compensation in State-owned enterprises and government compensation regulation’s economic consequences. It provides ideas to improve the performance of state-owned enterprises and effectively motivate executives, and provides a reference for national regulatory authorities to develop executive compensation control policies.It finds that executive compensation of State-owned listed enterprises in China has a significant reference point effect, and the reference point effect has a promotion to the performance of companies. Government compensation regulation has really weaken the performance sensitivity, but it only has a small effect on the contract reference point. The paper suggests that decision-makers should take full account of behavioral factors of contracting parties during the decision-making process and weigh the impact of them and adjusting the executives’ compensation structure to enhance performance sensitivity and eliminating the negative impact of compensation control policies; The government needs to insist on combining market regulation and government regulation, and continuously improve the internal governance mechanism of state-owned enterprises, in order to effectively motivate executives and at the same time control their behavior, then forming a rational income distribution relationship between the state-owned enterprise executives and employees, and having an appropriate and reasonable compensation structure, and effective supervision.