Empirical Study On The Influence Of Political Connections On Executive’s Compensations

In the past few years, as the information disclosure system of China’s security market matures, the compensations of senior executives has been gradually catching public’s great attention. Managerial power theory holds that senior executives can obtain personal profits by utilizing their controlling power. The compensation contract designed to cut the agency costs has become a part of it. The impact of agency problem of senior executive’s compensation contract on corporate performance has been becoming one of the hottest topics among researches. Different from the mature capital market of western world, the socialist marketing economy is still tightly controlled by the Chinese government. The feature of "transition" reflected on the compensation contract is that the pricing of senior executive’s compensations is affected by some political factors, such as political connections. Therefore, whether senior executives obtain personal profit by taking advantage of his (hers) political connection? Whether firms have been overestimating the value of political connections? Studies of these questions will have great implication on the perfection of senior executive’s incentive problem of China’s public companies. The main contents of this study includes three aspects.Firstly, we analyzes the institutional and practical reasons of compensation rigging by senior executives with political connections and finds that:the intervene of local government on economic development and the operating rule featuring by "relationship" provides advantageous soil for compensation rigging. To be specific, taking overpay and overperks as the proxy variables for personal profits, using the SH A-share companies in manufacturing from 2008-2013 as study samples, we examines the influences of political connections on overpay and overperks. The results shows that political connections have non-significantly positive correlation with overpay, while has significantly correlation with overperks. All above means senior executives with political connections have compensation rigging behaviors.Secondly, the hypothesis of the Justifying compensation holds that when executive’s compensations are very high which means they have strong demand for compensation justifying. And then they will increase the pay-performance sensitivity to justify "the justification of the results". Based on this opinion, we continued to examine when senior executives carry out compensation rigging, whether they will take justifying actions to disguise in order to eliminate or ease the rage costs of the public. Specifically, we divides our sample into overpay-sample and overperks sample, and finds that:in the overpay-sample, political connections doesn’t improve the pay-performance sensitivity, while political connections significantly improve the perk-performance sensitivity in the overperks-sample. Basically, this result certificates the hypothesis of the Justifying compensation. The only difference is that we extend the demand for justifying compensation from "high" to "irrationally high".Through analyses above, we can establish the following logic:as one part, senior executives with political connections obtains personal profits through compensation rigging, as another part, they justifies their personal profits by increasing the pay-performance sensitivity. Therefore, it’s practically meaningful to examine the economic results of compensation rigging. Through further research, we finds that: the excess monetary compensation and perks caused by political connections have significantly negative correlation with firm performance. It has been considered that political connections are very important resource for company development in China, and the incentive are the key factor to make senior executives utilize political connections for company’s sake. However, our research shows that there are overestimation for the price of political connections. Based on our findings, the innovations of this article are reflected in the following three aspects.Firstly, we extends the researches of executive incentives to perks, the existing literatures usually base their study on monetary compensation, other kind incentives, such as perks, are almost unseen. Through comparative study, we finds that senior executives with political connections prefer perks than monetary compensation, the opportunism is even more serious.Secondly, our research is helpful to understand the influence route of political connections to corporate performance also provides new perspective to evaluate the political connections. In recent years, some researchers holds that to take advantage of political connections, the "motive" is the precondition, and the "incentive" is the support system. Differently, we move forward to "opportunism" and the empirical evidences shows that apart from motive and incentive, supervision is also an important mechanism for firm to utilize political connections.Lastly, our research makes a supplement for the hypothesis of justifying compensation. The hypothesis holds that high salary means strong demand for justifying, and then they will increase their pay-performance sensitivity. The justifying action also are reflections of opportunism. Based on this opinion, our research shows that only when the compensations are irrationally high, namely, there are compensation rigging behaviors, the senior executive will carry out compensation justifying. In some sense, we provides the full logic chain of senior executive’s opportunism, including both compensation rigging and compensation justifying.