The Effectiveness Of Executive Compensation Incentive Mechanism In Chinese Commercial Banks

In recent years, the growing surge of the manager's compensation has been one of the most important focuses for the society and the occurrence of subprime mortgage crisis again pushed it to the cusp. Because the bank oversight capability is stronger than the normal stockholders, the bank is usually regarded as a tool to solve the problem in other company governance structure. As the world economy development and progress of the financial sectors, the function and effects of the bank have changed a lot. The bank governance has gradually become the hot topic of the practitioners and theorists and manager incentive is definitely one of the most important part. The current domestic researchers study this topic mainly from the institution and reform perspectives; however, the study by the empirical method is not so much. There are two reasons for it. On one hand, because the bank reform has begun for not a long time and the scientific pay system is being under construction which means the incentive effect has not reflected. On the other hand, because of the low level of the bank information, we can not get much data about the bank. These two reasons bring about the difficulty that we study bank manager incentive problem with the bank data.The purpose of manager incentive is to reduce the agency cost caused by the separation of the ownership and management right of the company. But the deviation of the manager individual utility maximization and the maximization of company value makes the manager behavior not necessarily consistent with the interests of shareholders; however, the power owned by managers provides a good channel to maximize their personal utility. With the fact that the internal oversight mechanism and manager labor market are not so good, executive power can not be effectively constrained. So manager power has more serious effects on Chinese bank operation and manager incentive.With the study of the manager power theory and the agency cost theory, we make clear the effect of manager power on the validity of manager incentive. We empirically study the validity of Chinese bank manager incentives and the effect of manger power on the incentive plan from bank performance and risk perspectives which both are the goals for bank managers with the data of 85 Chinese banks from 2006-2009. We find the sensitivity of manager compensation to performance is very low for Chinese banks and the high manager compensation has not brought bank good performance. But the manger power has a significant effect on manger compensation that is the more power mangers get, the higher compensation they receive. By this way, manager power affects the sensitivity of the manger compensation and bank performance. However, we find that the high compensation has effectively encouraged manger to reduce the bank risk and manager power affects the sensitivity of manger compensation to bank risk.On the basis of our empirical study, we suggest that we should continue to improve bank internal governance structure and reduce the manger power in the bank reform process. We should establish the evaluation system which can reflect the change of bank performance and risk in order to provide an excellent standard to evaluate the manager ability and hardworking level and enhance the independent level of the board remuneration committee in order to improve the oversight ability of the board.Meanwhile we should improve the external governance quality and make the manager labor market more effectively,which means the market-oriented appointment system will be more important. The structure of manager incentive should be changed a lot and in order to enhance the sensitivity of the manger incentive to the bank performance and risk, the percentage of long-time incentives should be improved. Last but not the least, the external supervision to the manager should be improved so that their behaviors will be more effectively constrained.