Executive Incentive On R&D Investment

In recent years, our government has been urging companies to innovate, and R&D investment is a key part of the independent innovation of enterprises. R&D investment is essential for a modern competitive enterprise, especially for high-tech enterprises. In the capital allocation process, the high-tech enterprises in China’s R&D investment have improved, but our R&D investment is inadequate relative to developed countries. The agent is the core of modern corporate governance system, but the shareholder’s interests and the interests of CEO have the possibility of conflicts. This conflict will affect the innovative power of the executive thereby causing the lack of business growth momentum.Based on principal-agent theory, an effective incentive mechanism should be one that the interests of owners and executives are consistent. The high-tech enterprise incentive mechanism whether can achieve this requirement or not is a problem worthy of study. Secondly, whether the support of the various preferential policies, innovation incentive policies and financial policies of our government on the high-tech enterprise can promote executives to invest R&D is also a field of study. The preferential policies include the national unity policies and local policies. The national unity policy include:enterprise income tax rate of15%, R&D expenses enjoying the income plus net of concessions and technology development, technology transfer consulting contract can be exempt from business tax concessions. Local policies will be different, but most of them are consistent with national policies. Incentives to innovate policies were clearly pointed out in2006, the Ministry of Finance, National Development and Reform Commission, Ministry of Science and Technology and Ministry of Labor and Social Security issued independent innovation incentive distribution system. And financial policy in2007, the Ministry of Finance, National Development and Reform Commission, Ministry of Science and Technology and Ministry of Labor and Social Security promulgated the "opinions" on the basis of independent innovation incentive distribution system. Finally, the market incentives to innovate that can help the shareholders to solve the problem of the lack of R&D investment executives are worth it to verify. This article,based on the inner link of high-tech enterprises of CEO pay incentive and R&D investment, combined with the ownership of enterprises in China, test how different types of executive compensation impact on R&D investment through theoretical analysis and empirical validation.The paper reviews the basic theory and research of executive incentive and R&D investment. We present four hypotheses of this study in accordance with the principal-agent theory and tournament theory. Three types of incentives have a positive impact on high-tech enterprise R&D investment in the total sample, but the state-owned enterprises R&D investment significantly more than private enterprises. The main purpose of this paper is to find the effectiveness of the incentive mechanism in China’s high-tech executives through regression test, and to find the difference between different ownership. Then, there are three years of data in217high-tech enterprises which meet the requirements. The model of regression analysis include three indicators selected to measure executive incentives (incentive strength of executive compensation, executive equity incentive strength and executives promoted to the excitation intensity), and the relative indicators of corporate R&D investment. Based on three years of data, we use correlation analysis and multiple linear regression analysis to test the hypothesis put forward.The results of this study as follows:(1) executive short-term incentives have a significant positive impact on R&D investment;(2) executive equity incentive for R&D investment has a positive effect;(3) the management layer promotion incentives have a significant positive impact on R&D investment;(4) state-owned enterprises in the executive incentive have more remarkable impact on R&D than private enterprise. The empirical results verify the previous assumptions; the executives did not take to reduce R&D to improve short-term performance in order to improve short-term incentives, mainly because the executive incentive mechanism is more perfect in this regard than before. Equity incentive mechanism should be easier to meet the requirements of the shareholders, but this is not very significant impact on R&D investment in the empirical results, which may be due to that the implementation of equity incentive for listed companies in China is still in its early stages, and that mechanism design is not sophisticated. So these companies also need to constantly learn and explore better incentive mechanism. Promotion incentives assumptions is verified that the tournament theory strong support for this research hypothesis, which means that the pay gap between executives and other senior managers tend to increase R&D investment in order to maintain their position in the enterprise, and that other senior management personnel also to work hard in order to have the opportunity to be promoted which can obtain far higher than the pay now. For the last assumption, the state-owned enterprises more easily than private enterprise to increase R&D investment, which fully describes the state-owned enterprises under the control of the various departments relatively impeccable, and maybe the various state incentives will let state-owned enterprises to benefit firstly. Overall, under the premise of the various preferential policies and market incentives, the empirical results demonstrate the high-tech enterprises in China executive incentives is relatively effective, but there is a need for further improvement, especially the incentives of private enterprise.This article has the following advice from the conclusion:First, focus on equity incentive. There are279samples of651samples without the implementation of equity incentive in the descriptive statistics. But we found that equity incentives had a significant positive impact on R&D investment in the empirical test, so equity incentive should be incorporated into the incentive mechanism in all high-tech enterprises. Second, government policies support. As we all know, China is a policy-oriented country. Our Government’s policies have significant impact on the enterprises. The Government should strengthen the improvement of relevant policies and regulations, such as increased support and preferential policies for high-tech enterprises, appropriate incentives for corporate executives’ access to innovation patents. Third, companies should pay greater attention to Promotion Incentive. Found in the empirical analysis of research results, the executive promotion incentives on R&D investments have a significant positive correlation. Salary treaty signed with the executives should be linked mechanisms for promotion with the company’s innovations which can promote executives to increased innovation. Fourth, increase the importance of the impact of innovations on the salary assessment. The salary assessment mechanism should be taken full account of the innovations. If the executives increase R&D investment to a certain extent in the current, which makes the company’s innovative capacity improved, we should increase the salaries of executives.Contributions of this paper:First, we collect the sample data of this study after a lot of policy changes, such as, tax incentives for high-tech enterprise, innovation incentives and financial policies. These policies will affect the enthusiasm of the executives on R&D investment, so the research provides an empirical basis for the government to continue to promote and improvement of such policies. Furthermore, this article distinguishes state-owned enterprises and private enterprises according to the different nature equity, and the study confirmed that two types of enterprises exist some differences, especially equity incentive. This discovery could remind private enterprises to learn from state-owned enterprises. In addition, previous literature pay much attention on compensation incentives and equity incentives, but using promotion incentives in the range of executive incentive, quantified by pay gap, and then studying its positive impact on R&D investment is also this article a contribution.The deficiencies of this article:First, because of the limited energy, we only select three years of data from the high-tech industry. Secondly, more than half of corporate did not invest R&D, and some other held a lower level. There are still many companies did not have equity incentive. The above factors may lead to certain bias of empirical results.The future research direction:First, investigator can list all companies as a sample and increase the time span of the selected sample which this can be found the incentive differences of two time slots. Secondly, promotion incentive is measured by the pay gap in this paper, but maybe there are alternative better promotion incentive variables (such as average age of executives). Finally, although all kinds of incentives have positive effects on R&D investment, the higher the better is not possible. There should be a best value. How rational design a model to study the optimum equity and allocation compensation between shareholders and executives is a future research direction.