Research On Long-Term Incentive Mechanism For Executives In Modern Corporations

A modern corportion should have a perfect institution system which could sustain its development. Incentive mechanism, especially long-term is most critical. Due to the special position and role of the executive in a corporation as well as the natural traits of property rights of human capital, the importance of founding an effective incentive mechanism for executives has been more and more clearly realized.Right now, there are many researches on singular incentive mechanism while less on manifold ones, more focusing on short-term incentive, less focus in long run, more on the explicit incentive, less on the invisible. Therefore, it is very necessary to study the incentive mechanism systematically, especially in the long-term.The purpose of this dissertation is, based on the corportion incentive mechanisms analysis both at home and abroad, to discuss its effective composing structure. The dissertation probes into the relationship, substitution effect and interaction between different mechanisms and the incentive effect on executives, to investigate the role of long-term incentive mechanism on executives and the problems arising from both explicit and implicit incentives, and to give suggestions. The dissertation puts up that it should construct a long-term, both explicit and implicit, incentive system on executives.Research of long-term incentive mechanism on corportion executives is a hot subject both in theory and practice. It involves economics and management as well as many other fields. This dissertation focuses on the corportion practice, therefore, its methodology is an associative one, including incentive theory both in economics and management, qualitative and quantitative analysis, theoretical and empirical research.The main content is as follows:(1) Executives' monopoly of the control rights is the ultimate reason of long-term incentive on executive.With the seperation of two rights separated, the executives' monopoly of the corportion control rights is the ultimate reason of long-term incentive on executive. The human capital being just a precondition, the risk mechanism of the corportion determines the long-term incentive on executive. The degree of monopolization of corportion control rights should be treated as the base to design executive incentive intensity, and the structure of corportion governance and market environment determine the pattern of the long-term incentive mechanism on executive.According to the relationship of principal-agent in modern corportion, the executive gets the rights to manage and to make decision, he would, therefore, make use of his power to gain advantage in obtaining information, and to challenge the ownership by his control. It is a game between ownership and management. In order to gain the maximum profit, both parties should compromise and the result is to encourage the executive by a proper long-term incentive mechanism to realize the maximum of self-interest through seeking the corportion's maximum interest.(2) It is critical to construct a long-term incentive system for executive.An incentive model both in short-term and long-term based on the performance has been devised and the solution shows that the executive incentive is related to the current performance of the corportion, expected marginal production, the degree of risk avoidance of owner and executive or the ratio of their risk avoidance, a scope of the incentive intensity coefficient been given as well. The analysis implies that a combination of short-term and long-term incentivess should be taken.In corportion practice, on the one hand, incentive effect is generated by a composition of several incentive mechanisms on the executive. On the other hand, as a rational executive, in order to realize the goals such as self-development and human capital increment, his need towards incentive should have multilayer and manifold. He may pay attention to short term incentive but more in the long-trem, less explicit incentive but more on implicit one. In other words, an effective long-term incentive mechanism is a system work.A perfect market economy has not been set up in china and the construction of long-term incentive mechanism goes up to a key stage. This dissertation gives a systematic review upon the long-term incentive mechanism on executives, discusses the interaction, substitution and relationship of explicit and implicit incentive mechanism, as well as the effective pattern.(3) The control right is the most important long-term incentive.The strongest incentive in our country is the right to control the corportion. The analysis implies that, because of the much more gain through control than explicit incentive and the satisfaction to reputation, status, power etc., the executive has a consistent incentive to monopoly the control rights. Such incentive to control has definitely substituted explicit incentives, restrained the implicit ones, blocked the construction of other implicit ones and make the stock incentive distorted and invalid. The control right has become the most important long-term incentive mechanism, therefore.Based on the analysis of the award and restrain of the executive control right, to make full use of the incentive mechamsm is to avoid the executive's monopoly of control right. Meanwhile, the generalized gain effect through control rights such as executive reputation, status and so on should be given.Therefore, the key to the foundation of long-term incentive system is to improve governance structure, to balance allocation of corportion control rights. And the specific measure is to improve the function of directors and board of supervisors and set up a mechanism both inside and outside control.(4) Implicit incentive mechanism should be reconstructed and improved.In an incomplete contract, the executive does not make full efforts according tothe visible articles, the implicit articles being also important incentives. The incentive effect of rights and status that an executive owns is much bigger than the set material incentives. Since the explicit incentive mechanism has made great progress and will be carried out, with incentive intensity more and more strengthened, if there is not an efficient mechanism of implicit incentive in the long-term, the long-term incentive mechanism for executive will be nonsense, even negative.In china, the construction of implicit incentive mechanism is not so well as the explicit ones. With the probability of the incentive contract broke-up increased and lack of long-term expectation, the reputation mechanism shows no effective. And as the recruitment of managers is institutionalized and separated by geography, the market mechanism of recruitment becomes ineffective. In order to set up an effective incentive system for executive, the invisible incentive mechanism should be reconstructed and consolidated.To build up an implicit incentive system, first of all, it is to cultivate the "enterpreneurship" among executives. A kinds of incentive mechanisms won't make sense without executive's own efforts. Secondly, it should put up with the institutional environment which a perfectly implicit incentive mechanism needs, to build up and keep mechanisms such as control rights reputation and managers' market better off.(5) Executives holding stock is the most effective way of equity-basedincentives.Equity-based incentive is the most widely used explicit long-term incentive mechanism. Through analysis upon the factors that affect performance, incentive degree on hard-working and risk taking, it is found that an effective equity-based incentive plan needs to balance design of incentive contract. All the supervisor needs is the sufficient information, it is hard to get it. So, in practice, the equity-based incentive is considered as a reason why it is hard for equity-based incentive to work as it supposed to be.Equity-based incentive are divided into three forms: stocks, future stocks and option. According to the instances of equity-based incentive in listed corportions, some comparative analysis are made ranging from the method and scheme of incentive.The main contributions or orinnovations are follows:(1) An overall literature review of the long-term incentive mechanism towards executive is given. A combined model of incentive is set up and the substitution, supplementation, and twisted relationship between diffferent mechanisms are analyzed according to the practice of listed corportions.(2) The analysis shows that the executive's monopoly of the control rights is the true reason for executive incentive, making it necessary to set up a long-term incentive system for executives. The control rights become the most important long-term incentive mechanism, therefore, its award and delegation has become key question of whether the incentive mechanism is effective or not.(3) A long-term incentive model based on performance is set up for executives, and the solution implies that the incentive to executives is related to the corporate performance, expected marginal production and the risk avoidance of owner and executive as well as their ratio of risk avoidance, the scope of the coefficient of short and long-term incentive intensity given, too.