A Study On Substitution Effects Of State-owned Holding Companies’ Non-pecuniary Compensation And Equity Incentive

Equity incentive and non-pecuniary compensation, although with different contract costs, are components of the incentive contract for executives, whose decision can be affected by the availability as well as the rate of return of the incentive methods. There is thus a substitution effect between the two incentive methods above, which has seldom been discussed in existing literature. Considering the particularity of executives’incentive in state owned companies, this thesis mainly studies the correlation between the welfare degree of equity incentive and the level of non-pecuniary compensation in state owned holding companies.This thesis has done a thorough research on the substitution effect that non-pecuniary compensation has on equity incentive in state owned holding companies, using data released by those companies during January 1st,2008, to December 31st,2014. The influence of the internal equity structure and managerial power on the substitution effect is also studied in both theoretical and empirical terms. Results of the research show that non-pecuniary compensation has a significant substitution effect on equity incentive. It appears that an increase in equity balance weakens the substitution effect that non-pecuniary compensation has on equity incentive, while an increase in managerial power strengthens the substitution effect. The results also indicate that a well-balanced equity can effectively reduce the moral hazard of the executives and facilitate incentive contracts that are good for the companies’development. It is important to take the performance-vesting conditions into consideration in the drafting process of equity incentive programs in state owned holding companies, in order to prevent equity incentive from becoming a tool for the management to make up for the loss of non-pecuniary compensation.