An Empirical Study On The Impact Of Strategic Uniqueness On Executive Compensation

Nowadays market is more competitive and enterprises cannot step out in front of industry by simple imitation. In such circumstances, the strategic uniqueness is playing increasingly important role for enterprises in the achievement of long-term development. However, when choosing their strategic uniqueness such as increased input of research and development or establishment of brand edge, initial investments could be huge, lowering enterprises’current profits. At the same time, a strategic uniqueness means higher operational risk, leading to an increased volatility of earnings. Traditionally executive pay is linked to enterprises’accounting performance while it is highly probable for executives who choose exclusive strategies to receive unfavorable treatment. This arrangement obviously imposes adverse effects on enterprises which attempt to achieve long-term development. Consequently, sensitivity of executive pay to accounting performance should be lowered while that to effectiveness of exclusive strategies should be raised in order to acquire long-term competitive advantages. Then by this yardstick, is executive payment contracts effective enough? And what impacts of state ownership and local legal systems have on the relationship between executive pay and strategic uniqueness.To dig into issues stated above, we conduct a research which chooses data of listed companies in Shanghai Stock Exchange ranging from2003to2011as our sample. Overall, Chinese list companies have realized the importance of strategic uniqueness to their long-term development and taken into account of this factor when setting executive pay. This phenomenon is proved by the significantly positive relationship between strategic uniqueness and executive pay. However, the absolute value of this coefficient is relatively small, showing insignificant impacts of strategic uniqueness on executive pay. In addition, there is a problem with the substitute variable of strategic uniqueness when setting executive pay. To be specific, executive pay of companies whose strategic uniqueness works well is more sensitive to accounting performance. Apparently, under this condition executives are less motivated to pursue long-term development. Moreover, we find that the relationship between executive pay and strategic uniqueness differs with different natures of companies. In state-owned enterprises, executive pay of companies whose strategic uniqueness works well is less sensitive to accounting performance. Conversely, all other things being equal, that of private enterprises is more sensitive to accounting performance. Last but not least, we find that local legal systems also have impacts on the relationship between strategic uniqueness and executive pay. With high level of legal system, executive pay is relatively less sensitive to strategic uniqueness. Higher level of legal system is a solution to the dependence of executive pay of companies whose strategic performance works well on accounting performance, up to a point. Unfortunately, this effect is quite limited.