Corporate Performance, Executive Pay And Pay Viscosity

With the continuous development of China’s market economy, separation of ownership and management rights makes management control the enterprise in essence, enabling executives pay more attention.In recent years, more and more high price paid to top executives burst out in listed companies, and attracted wide attention and heated debate in the capital market and even the whole society. Whether the executive pay is high or low? The level of executive pay should be determined by what factors? How much compensation should be reasonable? These questions are the focuses of the debate.There has been a lot of research about the correlations of the executive pay and corporate performance in our country and abroad. Executives pay had been considered not to be related to corporate performance in earlier studies abroad, but more subject to firm size, regional factors and so on. Research in recent years found that executive pay and corporate performance relationship is gradually strengthened. In early years, domestic academics use standard methods to find the influencing factors of executives pay. With the gradual promotion of empirical research, our scholars are beginning to use statistical methods to study the relation between executive pay and the influencing factors, and the correlation between the two elements becoming the entry point. Currently there still two points about this subject, related and not related.Up to now, the academic research puts much focus on whether the two factors related, but little on another problem:If changes of two factors are on the same pace?Executives are the mainstays of survival and development of enterprises, playing a very important role. From the public information we can see that, when the companies’performance is good, executive pay soars; but when the performance decreases, executive pay does not decrease or only decrease a little. The rate executive pay increases when corporate performance updates is bigger than which declines when corporate performance downgrades, which phenomenon is called viscosity.This paper aims to discuss the correlation between the two factors, and then viscosity. On the former basis, some preliminary evaluation should made, and reference should be provided to future research.This paper is divided into seven parts, including:the first part is introduction; the second is literature review; the third is theoretical research and assumption; the forth is research plan and sample selection; the fifth is empirical research on the correlation of executive pay and corporate performance; the sixth is empirical research on the viscosity; the seventh part is the interpretation to the results and conclusion to the research.In this paper, multiple linear regression model is used as the research model. Sum of the three highest wages of all directors, supervisors and senior management should be used as the executive pay, which would be logarithmic. Net profit and Tobin’Q should be used to measure the corporate performance. Besides the dependent variables and independent variables, some control variables are adopted too, including:use the nature logarithm of revenue to control the sizes of enterprises; use the nature logarithm of free cash flow to control the cash flow; use the asset-liability ratio to control the capital structure; use the controlling shareholders’ownership percentage to control the stake of major shareholders; use dummy variable to measure the separation of chairman and general manager; use another dummy variable to measure the nature of the ownership, whether it’s state-owned of non-state-owned.We select public information from the companies listed in Shanghai and Shenzhen during the year 2007-2009 as the researching samples. As to convenience and property of this research, such samples were removed:loss enterprises; financial sector enterprises; whose free cash flow is negative; whose asset-liability ratio is bigger than 1; whose data is missing or invalid.The multiple linear regression analysis showed that executive pay and corporate performance are significantly correlated. At the same time, executive pay is correlated with size variable, negatively correlated with asset-liability ratio and major shareholders’ownership percentage. The result also shows us that executive pay in state-owned company is significantly lower than that in non-state-owned company. The first hypothesis is supported.On this basis, we continue to use model 2 to discuss the viscosity between executive pay and corporate performance. A dummy variable is introduced to measure the decline of the enterprise, and is cross-multiplied by performance variable to measure the viscosity. If the variable’s estimated parameter is significantly negative, existence of the viscosity is demonstrated. The result of model 2 shows that the cross-multiplying parameter is not significantly negative, so the second hypothesis is not supported, which means no viscosity between executive pay and corporate performance.There are three innovations in this paper, the first one is that free cash flow variable is adopted in this paper; the second one, besides the direction of executive pay changes, this paper fatherly discussed the extent of executive pay changes when the corporate performance increases or decrease; the third one is that we not only used the summarized data, but also used some classified data to discuss the issue.