Research On The Effect Of Institutional Ownership On The Effectiveness Of Compensation Contract For The Political Connected Executive

The executive compensation,as an important method to solve the principal-agent problem between shareholder and manager,has been public concerned in recent years.What restricts the effectiveness of executive compensation contract and how to establish a more effective compensation contract has become an important problem to be solved urgently.With the gradual rise of institutional shareholder activism,institutional investors,as an important part of China’s capital market,begin to actively participate in corporate governance and supervise executive compensation.Political connection,as a kind of social capital for executive and government resource for company,makes executives have higher management power and compensation bargaining power.Then,is the relationship between political connection representing the executive power and institutional investors representing the market force mutual balance or conspiracy of interest?This paper selects the executive compensation data of Chinese A shares listed companies from 2005 to 2015,and studies the influence of the institutional ownership and the political connection on the effectiveness of the executive compensation contract in the different property rights.On this basis,we introduce the interaction item between institutional ownership and political connection,and discuss whether there are significant differences under different property rights.This paper shows that:(1)The institutional ownership can significantly improve the compensation-performance sensitivity and reducing the compensation stickiness of executive,especially in private listed companies;(2)The political connection improves the compensation-performance sensitivity and compensation stickiness of executive in private listed companies which provides convenience for overcompensation defense,but reduces the compensation-performance sensitivity and improves compensation stickiness of executive which undermines the effectiveness of compensation contracts in state-owned listed companies;(3)Institutional ownership significantly reduces the compensation-performance sensitivity and compensation stickiness of the political connected executives in the private listed companies,but significantly improves compensation-performance sensitivity and the compensation stickiness of the political connected executives in state-owned listed companies.Then,we put forward recommendations for the listed companies to formulate effectively compensation contract,guide and regulate the healthy development of political connection by government agencies.