A Study On The Validation Of Executive Incentive Contracts In Chinese Listed Company

This paper based on the theory of principal-agent, human capital theory and incentives theory, to set the basic premise of the study. By researching into the problem of the management mechanism between the executive Incentive and the operating performance of corporate, and between the executive Incentive and earnings management, the study analyze the effectiveness of incentive contracts respectively from both aspects of the stimulating and binding. Last, using the annual report data from a sample of listed companies, we empirically test the relationship between executive incentive and the operating performance of corporate, and the relationship between the executive Incentive and earnings management. By the correlation analysis and regression analysis of the annual report data of listed companies in 2008, this paper concluded following findings and recommendations:First, the higher the operating performance of listed companies, give executives more generous annual remuneration. Therefore, the annual compensation (salary) incentive contracts which shareholders set for the listed company executives specially, should base on the company performance, paying the annual remuneration linked with the operating performance for executives, let them commitment a certain degree of the company's operating risk, so the principals can effectively identify the abilities of operating and managing enterprises, so as to ensure that the agents'decision and action of company operating is conducive to the shareholders'utility target of maximizing corporate value the usefulness of objective, so can improve the degree of the agent's effort.Second, the higher the operating performance of listed companies, the value of the executives'holding company's stock will be higher. Therefore, when the principals design the equity incentive contracts for executives, the number of shares be given to the executives should be linked with the company's actual operating performance, to let them commitment a certain degree of the company's operating risk, so that can make the expected utility function of executives consistent to the shareholders'utility function, to encourage them make efforts according to maximize their profits (or value maximizing). Third, the lower operating performance of the company, its size (executive's implicit compensation) will be larger. Accordingly, the Board should be careful to make the decision of expanding the scale of company according to the specific circumstances, to obtain the highest possible operating performance, to control the executive's implicit compensation (such as social status, travel treatment, post consumer and office conditions, etc.). Therefore, the executive's annual compensation which can reflect their capacity of operating and managing enterprises is more reasonable, then avoiding executives make the decision and action of expanding enterprise scale to access their own interests (a higher social status, better treatment of travel, more high-end consumption and duties of the office more luxurious decor conditions, etc.), but not conducive to the interests of shareholders.Fourth, increasing the number of the reported earnings may enhance executive's annual compensation. Thus, when the shareholders of listed companies set the annual remuneration for senior executives, should not simply consider the level of accounting profits which reported by the executives for company performance, but also with non-financial indicators (such as market indicators) to evaluate the results of the work of the executives, thereby reducing the possibility of the executives'earnings management for their own interests.Fifth, increasing the number of the reported earnings can enhance the value of the executives'holding company's stock. Therefore, when the trustee to acts the personnel carry on the stockholder's rights drive, should set up the strict auditing system (for example independent National audit office) to come the report earnings level which provides the executives to carry on the strict audit, enhances the earnings report the quality, thus reduces the possibility of the executives operating the profit in order to enhance their stocks'value.