Research on the Incentive Mechanism of State-owned Enterprise Executives
|School||Southwestern University of Finance and Economics|
|Keywords||State-owned-enterprises Executives Incentive mechanism|
In2008, subprime crisis broke out in USA, that triggered the world’s most serious economic and financial crisis since the1930s, which is characterized with a long duration, wide spread and huge damage. After the outbreak of financial crisis, the phenomenon regarding astronomical salaries that given to organizational executives especially those from financial sector has become a hot debate among the public at various level from the president of the country to the wage earners. As a result, western developed countries have drafted or released a series of policies and regulations to strengthen the supervision of corporate executive compensation. Similar tothe western countries, questions and criticisms about the high executive pay levels among Chinese state-owned enterprises(SOEs), joint-equity enterprises, financial and real estate industry etc are raised. Chinese government then promulgated a series of guiding opinions to regulate the market. In the post-financial crisis, the executive pay of the SOEs, especially the Chinese central governmental controlled enterprises, receives a widespread concerns from the society."How to design the most effective compensation system for SOE executives" has constituted the core of the incentive mechanism SOE executives. At present, one of the major projects of reforms of SOEs is about how to develop and design the reward system of China’s SOE executives, which has which has become the fundamental issue that this study explores. However, from a global perspective, it can be seen that, the performance of SOEs generally appears weak.. The issue of how to improve the performance of SOEs and to help them play a more important role has become the major concerns among various countries in the world. According to the Organization for Economic Cooperation and Development’s (OECD)experience, a good structure of corporate governance has become prerequisite for the development of SOEs. Among them, the incentive mechanism of SOE executives is identified as one of the core systems that help establishing an effective corporate governance mechanism. Based on the in depth study of SOE executives’ incentive mechanism, the solutions regarding how to set up an effective corporate governance mechanisms of SOEs that suited to Chinese national conditions, not only could enrich the theory related to incentive mechanism in SOEs, but also push the SOEs to reform successfully. All these have the major theoretical and practical implications.After identifying the topic, it has to clarify which angle should we choose this research. For the purpose of guaranteeing its high degree control of the SOE by Chinese government, ensuring the security and smooth running of national economy, Chinese government has controlled a series of activities such as staffing and compensation of SOE executives, which lead the incentive mechanism of China’s SOE executives to differentiate from those occur in western countries. Accordingly, combining with the institutional environment that our SOE executives face, this study focuses on two dimensions (namely explicit and implicit incentives) by discussing issues from the following three aspects:First, the incentive effects of short-term monetary rewards for executives. For the incentive mechanism of SOE executives in China, monetary reward is a means of the short-term incentives. Based on the existing research on corporate governance, the pay level of executives’ short-term monetary incentive has generally been found to have a sensitive/significant association with firm performance. This part of the thesis is to examine the correlation between the two variables. The short-term monetary incentive acts as one of the explicit and dominant incentives.Second, the incentive effects of long-term equity (stock ownership) for executives. Long-term equity is another important form of executive compensation mechanism across countries includes such as China. This part is to focus the sensitivity of the relationship between this mechanism and firm performance. The long-term equity also acts as one of the explicit incentives.Third, the executive’s political incentive effects. Different from western countries, where SOE executives are generally professional managers, a large number of Chinese executives are appointed by Chinese government, and the replacement of executives may be correlated with the implementation of governmental goals; then the executive’s political career promotion, has become an implicit incentive, which becomes a significant feature of incentive mechanism system in SOEs. The study explores this special incentive by using two types of research (namely empirical study and case study).Since the (partial) share of over half of listed companies are owned by the State-controlling shareholders, this study assumes that the differences among shareholders determines the difference of incentive mode of executives of listed companies, which in turn influences the firm performance. By comparing the sensitivity between company incentive and firm performance among selected companies, this study has conducted an in-depth research on the incentive mechanisms of SOE executives, and draw the following conclusions:(1) Short-term monetary reward incentives are still remained as one of the important incentives for SOE executives, but due to the external policy constraints of pay control, its incentive effect was weaker than those in non-state enterprises.(2) The incentive mechanism of long-term equity is rarely adopted by the China’s SOEs. This mechanism has not yet played a significant role in present mechanism of executive incentives.(3) Political incentive is one of important incentive mechanisms implemented by SOEs. Due to the high pay control, this kind of incentive mechanism has compensated for the inadequacy of monetary incentive compensation, and this incentive exerts a more significant effect in the SOEs, especially in the central state controlled enterprises.The origins and contributions of this study are reflected into three aspects:(1) Proposed a unique pattern of multivariate incentive mechanisms for China’s SOE executives. Currently, the domestic existing research on executive incentive mechanisms are more based on the Western motivation theory, and therefore lack of accurate grasp of the specificity and various stages of executives needs. This study, however, based on the existing explicit incentive mechanism, proposed a path of political motivation system in the context of China Specifically, the deficiency of insufficient explicit incentive mechanism for our pay control and the defects of ownership of SOEs, lead political motivation to become an effective supplement to the existing dominant (explicit) incentive mechanism, and this exploration provides an important research direction for the future research.(2) Fully analyzed the current status of political demands from China’s SOE executives. Based on the combined motivation model of pay-performance, this study involved the political motivation variables, and further divided the control power of executives into explicit and implicit control power. Through conducting empirical studies, it has been found that the executives of SOEs have two-way natural flows from enterprises to government administrative power. Accordingly, the pursuit of political authority could be an alternative incentive mechanism to the dominant motivation mechanism. this is particular the case in the central (governmental) control of large SOEs. This study confirms that political motivation in China is an effective alternative to the explicit incentive mechanism of SOE executives.(3) Studied the relationships between various incentive mechanisms. Owing to the special ownership background and management model of SOEs, the foreign traditional paradigms that based on the research direction of material incentives, does not work properly in China. This study argues that, apart from explicit motivation mechanism, political motivation mechanism (implicit incentive) is also identified as one of the major mechanisms within the Chinese SOEs, which emphasizes a variety of individual needs of executives. Overall, political incentives is identified as an important incentive mechanism that supplement to the traditional dominant incentive mechanism.This study concluded that, to strengthen the incentive effect of SOEexecutives, we should improve both of internal control and external institutional environments. Appropriate internal governance is the basis for corporate governance, establishing tripartite mechanisms include incentive, supervision and selection which are identified as one of the core issues of our corporate governance reform. Only the incentive mechanisms, supervisions and selections are effectively implemented, company directors and or executives can actively commit to their job, and to consciously maximize the shareholder value. At the same time, internal governance mechanism will also not play its role unless it is positively affected by the external institution. Institutional constraints from external market help facilitate the improvement of organization as well as its governance structure. Accordingly, strengthening the cultivation of external governance market, including market for corporate control and professional manager market, reducing the level of government control and weakening the level of executive administrative appointments, are all recognized as important means of realizing effective incentive mechanism for SOE executives.