Managerial Incentives And Firm Performance

A series of state-owned enterprises reform policies and actions placed establishing a reasonable incentive mechanism in a prominent position. In order to provide theoretical guidance to establish more rational incentive mechanism, this paper investigates the relationship among executive compensation, ownership and firm performance, then explores the reasonable proportion of shareholding and the appropriate forms of equity incentives. Firstly, this paper estimates the sensitivity of pay-for-performance to test the effectiveness of existing incentive compensation both from the perspective of single performance and comprehensive performance. Especially, the comprehensive performance indicator adopts the principal component analysis, which combine the available information of the single performance indicators-ROE, EPS and net profile. And on this basis, the paper mainly analyzes the impact of executive pay and ownership to firm performance. The main conclusions are as follows: 1.Executibe compensation is sensible to the change of firm performance, it has already reflected the characteristics of linking to the firm performance. 2. There is a significant positive correlation between executive compensation and firm performance, but the variance of compensation has a slight impact on the firm performance; In contrast, shareholding will have a more significant impact on firm performance. 2. The executive ownership and firm performance has a significant nonlinear relationship. The EPS first increases, then declines, and finally rises as executive ownership rises. To achieve the effect incentive, the firm can make executives hold a minority stake, in the 0 to 19.41% range, also it can make executives hold a pretty majority stake, over 41.81%. The optimal incentive is the executive holds the entire equity interest, thus, the manager is the owner.