Research On Managers’ Compensation Contract Based On Theory Of Fairness Preference

In the enterprise,the principal-agent relationship between shareholders and managers has always been the focus issue in corporate governance,and the design of manager’s incentive compensation system is one of the key problems of corporate governance.The modern mainstream of managers’ compensation incentive mechanism is usually based on the assumptions of rational people with self-interest and individual utility maximization,however,managers also pay attention to the fairness of their pay level besides the pursuit of their own material interests maximization.The deviation phenomenon between the theoretical prediction and the reality of economic life indicates that managers’ altruistic preference,especial fairness preference,should be concerned when making managers salary plans.At the same time,due to the asymmetry of information between shareholders and managers,shareholders always design remuneration policy to motivate managers to work hard based on the work performance of managers.However,due to the difference of value orientation,the objective function is always different,which leads to conflict and contradiction between them.For example,managers are more concerned about the short-term business performance and its conversion into the probability of personal gains,while shareholders are more concerned about the future value and development momentum of the enterprise.Thence,when designing managers’ compensation,shareholders should pay attention to the enterprise long-term performance besides its short-term performance.In another word,managers in their posts not only have a short-term performance goals,but also long-term performance objectives.In addition,managers with fairness preference will avoid the risk in managers’ compensation contract design,and the difference between the unfair disgust and the risk aversion is different,and this implies that the degree of risk preference have an important influence on the agent’s effort level.Therefore,considering managers’ risk preference,it is of great importance to design appropriate compensation contract of managers with fairness preference based on the short-term and long-term performance.Based on the principal-agent theory and the fairness preference theory in the literature,the combination of long-term performance and short-term performance was considered to design managers’ compensation contract model.Managers’ optimal compensation contract under fairness preference was investigated with this model which was tested through the experimental and empirical analysis.The results can provide the theoretical guidance for the enterprise to develop managers’ compensation contract.The major research work are shown in the following aspects:Firstly,combining with management psychological analysis,the relationship between managers’ fairness preference psychology,compensation contract and the degree of effort was investigated based on the definition and analysis of related main concepts of behavioral economics,game theory and principal-agent theory.Through the dynamic game model,the mechanism of managers’ fairness preference psychology to the compensation contract was explored.Moreover,managers’ compensation contract model was established combined managers’ fairness preference long-term and short-term performance evaluation criterion.Secondly,based on the short-term performance and long-term performance created by managers,the principal-agent model of managers’ long-term and short-term performance objectives by embedding the heterogene ity of managers’ horizontal fairness preference and longitudinal fairness preference was constructed using salary compensation contract.The influence of managers’ horizontal fairness preference and longitudinal fairness preference on the optimal compensation contract was analyzed to provide theoretical basis for managers’ incentive compensation for shareholders.Thirdly,the experiment with managers’ entrenchment behavior as a kind of managers’ performance of not working hard was conducted to investigate the salary contract under managers’ fairness preference.First of all,the subjects were divided into high-capacity managers and low-capacity managers in the course of the experiment.Then,the degree of the managerial entrenchment under the horizontal and vertical fairness preference were respectively tested to obtain experimental data.Finally,the effect of managers’ vertical and horizontal fairness preference on the managerial entrenchment respectively was investigated based on the description and curve analysis of the experimental data.The results prove that the fairness preference changes the structure of managers’ compensation contract.In addition,it is found that the sensitivity of managers’ vertical and horizontal fairness preference is different for managers with different ability.At the last,according to the previous chapter,managers are divided into two types: risk preference and risk aversion,and the effort degree of the two kinds managers was discussed in different length-term and short-term pay incentive intensity.In the end,the study puts forward managers’ long-term and short-term incentive contract,which lays the foundation for our country to alleviate the agency problem and improve the corporate governance efficiency.It also provides theoretical guidance and policy suggestion for perfecting the managerial incentive and restraint mechanism.