Government Subsidies, Executive Compensation And The Company’s Future Performance

In recent years, with the sky-high compensation exposed ceaselessly, executive pay received extensive attention of the public, and also, the rationality of executive pay is controversial. The optimal contract theory holds that compensation contracts can be used as a measure which can be used to motivate executives to work hard and then improve the performance. When the executive compensation and firm performance are linked together, namely signing a contract between the shareholders and executives, we can establish compensation contract system to promote the executives to work hard, to reduce the agent cost due to information asymmetry between them. In this way, we can not only meet the executives’ interests, but also guarantee the maximization of the value of the company at the same time. However, the three necessary conditions which the optimal contract theory is based on can’t be satisfied at the same time, the compensation contracts set up on the surface doesn’t achieve its original purpose. In the real world, there often exists the phenomenon that the executive compensation is unmoored from their performance. With the large losses of listed companies, their executives still have considerable compensation; executive compensation of listed company grows faster than the growth of the company’s performance. So, the optimal contract theory has received widespread doubt. While, management right theory arise at the moment. The management rights theory thinks executive rights are a major means to get high compensation for executives.Government subsidies are the national important fiscal spending. In recent years, the amount of the national government subsidies has increased significantly and the coverage rate of that is very large. According to the provisions of the existing accounting standards, government subsidies will eventually be included in the company’s accounting profits in the form of non-recurring gains and losses, therefore affecting the company’s performance. But this increasing of profit is not brought by executives’ hard work, and should not be owe to executives. Thus, it should not bring the pay increasing significantly. But, according to the view of political school, executives as self-interested individuals, they always aim to maximize the interests of the individual. According to the theory of management power, they will improve their absolute compensation by increasing the proportion of the nonperformance indicators in the evaluation. Because the growth of performance is caused by government subsidies while not the executive’s hard work, when this indicator joins in the compensation evaluation, we’ll overestimate the executives’ performance and executives’ pay. We call this part of the overvalued compensation the extra pay. If executives can use their rights and government subsidies to get high salary excess compensation, it will encourage managers to manipulate surplus to capture this kind of interests through the government subsidies, also it will reduce their initiative to improve enterprise’s performance. At last this maybe result in executives’ shirking behaviors, and do harm to the future development of the company.However, through the analysis of the existing literature and summary, we find that most of the research on government subsidies refers to the social effect and economic effect. When it comes to executive pay, it is mainly about the influence factors of executive compensation and the effectiveness of the salary incentive through researching the relationship between executive compensation and firm performance. But there are very few reaches of government subsidy when it acts as the performance evaluation of noise impacting on compensation as well as the economic consequences. Thus this article studies how the government subsidies influence executive compensation and firm performance in the future.This article will study of the following questions:Firstly, we study whether government subsidies affect the executive pay or not under the influence of executive power.Secondly, even if the improvement of performance is owe to government subsidies instead of executives efforts, the increasing in executive pay is all executives’ exceeded salaries led by government subsidy. Thus, we verify the influence on the excess compensation by government subsidies.Thirdly, if the government subsidies can lead to the increase of excess compensation, over time, executives will see it as a selfish way, which might cause executives to be lazy and is bad to the improvement of future performance. Therefore this article verifies how excessive remuneration caused by government subsidies influences the firm performance.Based on the above problems, this article firstly analyzes the theory related to executive self-interest and executive incentive, and then puts forward the research hypothesis. On this basis, we select all A-share listed companies during 2011-2013 in our country as the research sample, using excessive remuneration index to measure the relationship between government subsidies and excess compensation, excess compensation and company performance in the future. We find that government subsidies and executive compensation are significantly related. Further, by calculating excess compensation, the results show that the government subsidies and the extra pay have a significantly positive correlation. Finally, we inspect the impact on the economic consequence. The empirical results show that excessive remuneration leading by the government subsidies is negatively related to the future earnings, which will hurt the company’s performance in the future. The conclusion shows that there is a deviation in the effect of government subsidy. It makes the executives earn extra pay, but it does not bring performance improvement. So if you ignore the influence of this factors on the compensation contract design, it is likely not only to cause executive to pursue their own interests at the expense of the benefits of shareholders, but also do harm to the company’s future development. Therefore in designing compensation contracts, we must fully consider such factors as government subsidies to make reasonable compensation evaluation scheme and make full use of the compensation contract.