The Impact Of Business Distribution Between Parent Companies And Their Subsidiaries And Diversification Of Subsidiaries On Incentive Of Executive Compensation

Company shareholders and the board of directors incentivize executives in line with their action outputs and design compensation contracts based on their performances.According to the principle of incentive intensity in the optimal compensation contract theory,compensation level and the degree of correlation between compensation and performance depend on the marginal contributions of efforts executives made to improve company performances and the degree performance deviates from the actual effort of executives(Milgrom and Roberts,1992;Zhang,2014).In the light of the information amount principle,performance and non-performance indices that reflect the efforts and talent of executives should be brought into compensation contracts(Holmstrom,1979;Taylor,2013).In the face of the widespread phenomenon among the listed companies that business sinking to subsidiaries,which are becoming more diversified,most researches on incentive of executive compensation are based on overall consolidated performances and haven't considered differences of inner source of consolidated performance caused by various business distribution between parent companies and their subsidiaries and diversification of subsidiaries and the later incentive mechanism difference in light of overall consolidated performance.When business is mainly distributed in the subsidiaries,the executives in the listed companies should be still responsible for consolidated performance,while part of which depends on the efforts and progress in the subsidiaries(Lu and Zhang,2010).In that case,executives' influence on consolidated performance is limited.In the various business distributions between parent companies and their subsidiaries,there exists difference between the marginal contributions of efforts executives make to improve performances and the degree performance deviates from the actual effort of executives.Meanwhile,in the listed companies,diversified operation in subsidiaries confronts executives with more businesses across various industries and regions,which calls for higher demand of talent and more efforts into the executives'work.Without bringing business distributions between parent companies and their subsidiaries as well as diversification of subsidiaries into executive compensation contracts,the difference will lead to a mismatch between incentive basis and executives'talent and effort which consequently reduces effectiveness of incentive of executive compensation.The paper discussed the basis of incentive of executive compensation and analyzed differences including performance source,efforts of executives and talent information in line with different conditions of business distributions between parent companies and their subsidiaries and diversification of subsidiaries.It mainly adopted empirical research method of large samples and selected executive compensation level model and executive compensation-performance sensibility model to research influence of business distributions between parent companies and their subsidiaries and diversification of subsidiaries on incentive of executive compensation.The research findings are as follows:Firstly,the higher proportion subsidiaries business accounts for,the higher executive compensation level is.When business is mainly distributed in the subsidiaries,executive compensation-performance sensibility is lower;secondly,the higher diversification degree of industry and region among the subsidiaries of a listed company,the higher executive compensation level is.Compared with one listed company with lower diversification degree among the subsidiaries,the executive compensation-performance sensibility shows higher in the other listed company with higher diversification degree of industry and region among the subsidiaries.Taking the parent-subsidiary diversified distribution and diversification of the subsidiaries into account,we conclude the impact on executive compensation incentives:the sinking business can strengthen the effects of the degree of diversification of subsidiaries to the incentives of executive compensation.Extension researches find:Firstly,compared with private listed companies,business proportion,industry diversification and region diversification among subsidiaries in state-owned listed companies have more positive impacts on compensation level;secondly,when taking the existence of equity incentive into account to research the impact of business distribution and diversification of subsidiaries on incentive of executive compensation,incentive of executive compensation in some way can be substituted and weakened by equity incentive.This paper provides a reference for the study on incentive of executive compensation of listed companies,which is based on vertical scale business distribution between parent companies and their subsidiaries and the arrangement of industry and region in horizontal layout.