Interlocking Directorate And Top Managers Compensation Designing

The board indeed plays an important duty role in designing the top managers’ compensation in the modern joint-stock company which has the character of the separation of ownership and the control. This point is confirmed in both practical and theoretical research. Actually, Code of Corporate Governance for Listed Companies in China (2002) and Company Law of the People’s Republic of China (2006) are both point that the board is the subject of designing the managerial compensation in the company; theoretically, many researchers are also with the assumption of’the board is the subject of designing the managerial compensation’, they mainly carry out their research from two big theoretical perspectives: Principal-agent theory and Managerial Power theory. However, the two theories only examine the impaction of the company or individual natural attribute to the process of the board designing the managerial pay, and only regard the board member as the individual of fully independent, rational and self-interest, and other than the one of the interaction members in network, so ignoring the impaction of relation attributes (for example, interlocking directorate) of board to the process of the board designing the managerial pay. The phenomenon of interlocking directorate is very common in Chinese listed companies, and there is78.60%companies have the connected relationship in the2000-2010samples of the Shanghai and Shenzhen A-Shares of public listed companies. So, Investigation the impaction of the board to the executive pay design from the social network perspective has an important practical and theoretical significance.On that basis, this paper introduces a new board characteristics-interlocking relationship, uses the social network analysis and the multivariable regression, examining the affection mechanism of interlocking relationship to the executive compensation contracts. In practical terms, with the Chinese special compensation systems setting, this paper uses the2007-2010samples of the Shanghai and Shenzhen A-Shares of public listed companies, examines impaction of the connected relationship between the companies to the top managerial pay to performance sensitivity (PPS for short), then from the whole interlocking network perspective, studying the effect of the network position to the PPS. Through the theoretical and empirical analysis, we find that:(1) In order to reduce the fuzziness in establishing the pay decision, the companies which have the interlocking board will reference and imitate the interlocking business decision, so the focal company has the similarly PPS with the interlocking company, and the strength of the impaction of inside director is more than outside director;(2)The higher the network position centralization of interlocking board, the more the PPS of the focal company; Then divides the interlocking board into inside and outside director, points that the degree, betweenness of outside director and the closeness of inside director are significantly positive with the PPS; And after controlling the PPS of tie company, find that the betweenness and degree of the interlocking board and the degree of outside director are significantly positive with the PPS, but the other variables of network position are insignificantly positive with the PPS.The possible contributions of this paper as follows:Firstly, this paper breaks the inside research view of the company, based on the perspective of interlocking board which formed between the different boards, considering the interlocking board which maybe as the’bridge’among companies, can cause the transmitting of the relevant information of the company compensation decision, and may affect the decision of the board, so this paper innovative investigates the impaction of interlocking board to the board design top manager pay contract from the view of relation attributes of board. Thirdly, considering the board designing the pay contract needs to refer the outside information, and the different position of interlocking board with the different information resources, causes the differentiation of the information value, and then influence the result of the board designing the pay contract, so this paper examines the impaction of network position to the pay contract from the view of interlocking board whole network. Lastly, in measuring the PPS, previous research only through empirical model of the pay and the performance examines the impaction of some factors to the PPS, without regarding the PPS as a individual dependent variable or independent variable, although some researchers treat it as a dependent variable, but they measured it with ’the connected of the change of pay and the change of performance’, ignoring some characters of inside company, leaded the measure result universality, so this paper firstly used the Fang Junxiong’s model (2009)measures the PPS of each company, and regards it as dependent variable to examines the impaction of society network to it.