Research On The Impact Of Independent Directors' Local Tenure On The Executive Compensation-Performance Sensitivity

The independent director system of Chinese listed companies has been established for more than ten years.The effectiveness of the independent director system in China's practice has always been concerned by practitioners,academics and regulators.But scholars have reached different conclusions.According to the "Upper Echelons Theory" put forward by Hambrick and Mason in 1984,independent directors work through their unique psychological mechanisms(values,cognitive patterns and personalities,etc.),when they are confronted with the complex situation of enterprises.So the different backgrounds of independent directors should be the reason for diverse behaviors among independent directors.This article focuses on the common characteristics of local tenure.Meanwhile,whether this feature has an impact on the performance and the level of corporate governance of independent directors has been the research emphasis.Concerning the improvement of the performance sensitivity of executive compensation can reduce the agency costs between shareholders and senior management,which could achieve the connotation of executive compensation incentive compatibility as well.Moreover,the problem of corporate agency can be better solved and the level of corporate governance can be improved.In addition,due to the special institutional background of our country,Political connection is a very important alternative mechanism and there are some differences between state-owned enterprises and private enterprises in the formulation of executive compensation contracts.In view of this,According to the unique China's institutional setting,this essay use the normative and empirical research methods combined to explore the influence of independent directors of local tenure on pay performance sensitivity,with consideration of the principal-agent theory,upper echelons theory and reputation theory.Besides,The influence of independent director's political connection and the possible differences between the state-owned enterprises and private-owned enterprises have been further examined.This article is divided into five chapters.Firstly,the introduction describes the background and significance of research,which reviews and summarizes relevant domestic and foreign literature about the influence factors of executive pay performance sensitivity and the economic consequences of local tenure,before expounding the research thought,approach,innovation and features.Subsequently,the definition and theoretical basis define the concept of the independent directors,local tenure,political connections and executive compensation performance sensitivity,then describes the basic theory of the theoretical analysis,which are the principal-agent theory,upper echelons theory and the theory of reputation.The third chapter is the theoretical analysis and research hypotheses,which presents the research hypotheses after discussing the mechanism of the influence of local tenure on the executive pay performance sensitivity and in the political connections and different property rights of the enterprises,based on the analysis of the status quo of executive pay and the development of independent directors in China.The following part is the empirical test.This paper selects 14,508 observations of the A-share listing of Shanghai and Shenzhen Stock Exchanges from 2008 to 2016 as research samples to verify the hypotheses proposed in this paper with the use of Ordinary Least Square regression method.Finally,the fifth chapter comes to the conclusions of research and raises some policy proposal.At last,it mentions the deficiencies and prospects of the research.The findings are as follows:(1)There is a significant positive correlation between the independent directors of local tenure and the performance sensitivity of executive compensation.This shows that local tenure enhances the supervisory function of independent directors and significantly improves the effectiveness of executive compensation contracts.(2)Only when the independent directors possess political related backgrounds,there is a significant positive correlation between the local tenure and the performance sensitivity of executive's remuneration,which proves that the political connections significantly enhances the supervisory ability of independent directors.(3)Compared with the state-owned enterprises,independent directors of local tenure on the supervisory function is more obvious in private-owned enterprises.