An Empirical Study On The Relationship Between Managerial Discretion And CEO Compensation

Managerial discretion refers to the power and latitude of actions that managers of firms have in making strategic choices and taking actions . Managerial discretion has important effects on CEO compensation.Generally speaking, the greater the level of discretion, the greater the potential impacts of CEO on a firm and the greater risk that CEO will entail, and also CEO has more discretion in determining his own compensation. Consequently, CEO compensation should be higher in high-discretion contexts. According to the above analysis, this paper empirically tested the relationship between managerial discretion and CEO compensation.This paper first provided an overview of the current research and described the theories of the managerial discretion, which include Managerialism Theory,Agency Theory and Hambrick-Finkelstein Theory. Then analysed the influential factors of the managerial discretion and the relationship between them.Discussed the possible impacts of managerial discretion on CEO compensation. On the basis of theoretic analysis, this paper constructed influence path model , the 410 sample companies of"A"shares during 2005 in Shanghai stock market are selected. Finally, this paper empirically tested the relationship between managerial discretion and CEO compensation by using AMOS path analysis software. The results of full sample test indicated that managerial discretion had direct negative impacts on CEO compensation and slightly indirect positive impacts on CEO compensation via performance. As a whole, the relationship between managerial discretion and CEO compensation is negative and highly significant, this result is contrary to the theoretic analysis and the results of empirical study of forgien scholars. The results of grouping sample test showed that in the high-performance companies, managerial discretion negatively affects CEO compensation, but in the low-performance companies, the relationship between them is not significant. This result seems to support the viewpoint that the relationship between managerial discretion and CEO compensation will be stronger in firms with high performance than in those with low performance, but in fact, the result showed that in the high-performance companies, the inharmony between managerial discretion and CEO compensation is more prominent. In a word, Both the two empirical results indicated that there are still some disadvantages on CEO compensation mechanism of our listed companies, and it needs to be improving urgently.