Legal Regulation On Executive Compensation In Listed Companies: Lessons For China From American Experience

Executive compensation refers to the remuneration paid by the corporation, either in the form of cash or non-cash, to the management, including management directors and executives, as the consideration for their service. Under the circumstance of separation of ownership and control of the corporation, which is the common case for public companies (listed companies) in modern business world, the management acts as the agent of the owners of the corporation, the shareholders. The management, with the control of the corporation, may maximize its own interest at the cost of shareholders'wealth. Executive compensation has been considered as a tool to lower the agency cost and align the interests of the management and shareholders. However, in practice, executive compensation itself becomes a classic agency problem and the most intractable conundrum in corporate governance and, consequently, one of the hottest topics for legal scholars in western countries, especially the United States.Currently Chinese legal scholars do not attach much importance to executive compensation. Therefore few studies have been conducted concerning the legal regulation on executive compensation. This article, for the first time in China, thoroughly reviews American legal regulation on executive compensation in public companies in details, and make abundant comparisons between American and Chinese legal regimes regarding executive compensation. Based on the aforesaid efforts, the author analyzes lessons for China from American experience and offers his suggestions.The American legal regulation on executive compensation in public companies mainly includes: (1) Duty of care, duty of loyalty and"corporate waste". Executive compensation has long been deemed as the ordinary business of a corporation, and thus shall be determined by the board of directors. While generally shareholders have no right to intervene, they may, in the case that they are dissatisfied with the executive compensation, lodge a shareholder derivative suit in courts against the board of directors, claiming that the board breaches the duty of care or duty of loyalty, or that the compensation constitutes"corporate waste". (2) Restriction on tax deductibility. Annual compensation paid to the CEO and the four other highest paid officers of public companies which exceeds $ 1 million may not be deducted as an ordinary and necessary business expense. (3) Mandatory information disclosure. The Securities and Exchange Commission of the United States ("SEC") promulgated executive compensation disclosure rules in 1992 and revised the rules sweepingly in 2006, requiring full executive compensation information to be disclosed to shareholders and investors. Mandatory disclosure system is the most important regime regulating executive compensation in the US.Chinese legal regimes concerning executive compensation varies sharply from the US model. The Company Law of China provides that directors'compensation shall be determined by the shareholders and the officers'compensation be determined by the board of directors. But regulations issued by the State-owned Assets Supervision and Administration Commission ("SASAC") and other relevant government agencies regulating the executive compensation in state-controlled listed companies, which accounting for the majority of listed companies in China, have conferred too much power on these government agencies as to the determination of executive compensation and constrained the autonomy of corporations extraordinarily. And, compared with the US regime, the rules regulating mandatory disclosure of executive compensation are incomplete and ill-considered, and shall be improved sweepingly and systematically.Based on thoughtful review and comparison, the author argues that the government shall only keep moderate control and more reliance shall be placed on the market force in the determination of executive compensation in the future. The author finds no reason to adopt tax as a tool to control executive compensation. Furthermore, the author brings forward suggestions to improve the mandatory disclosure system concerning executive compensation.