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Remuneration Committee of the effectiveness of the system and its impact on China's corporate governance practices

Author: WeiZhi From: www.yourpaper.net Posted: 2007-11-20 00:13:34 Read:
Abstract: With the Remuneration Committee made generally available in the United States and Britain and other developed countries, the remuneration committee system has become an indispensable part of the Western corporate governance mechanism. But the effectiveness of the system of remuneration committee, theoretical research is currently no clear conclusion. However, Western Remuneration Committee also shows that the establishment and development of the remuneration committee system still has major implications for the corporate governance of listed companies in China's corporate governance practices, in particular, the successful practice in corporate governance.
Keywords: Remuneration Committee; effectiveness; managers pay

, The origin of the Remuneration Committee and its functions

Since Berle and Means (1932), "Berle-Means proposition, how to design an effective manager compensation contract in order to reduce agency costs, it will become the core issue of principal-agent theory research. In the Western corporate governance practices, design manager for the duties of the remuneration contract is generally to fulfill part of sub-committee of the Board of Directors - Remuneration Committee (compensation committee). In Britain and other developed countries, the Remuneration Committee is generally a permanent special committees of the Board of Directors of the Company, a director appointed by 4 to 6 Board members (most of them are independent), the exercise of the terms of reference of Remuneration Committee meetings.
For the major functions performed by the Remuneration Committee are: assessment of manager performance; development and monitoring of manager compensation plan; develop employee pension, profit sharing and other benefit plans. Views the company's staff remuneration plans; disclose and explain the conditions of remuneration of senior executives. Ability to develop effective compensation contract to solve agency problems, incentive compensation, and become an important criterion to measure the effectiveness of the Remuneration Committee.

Remuneration Committee established theoretical basis and effectiveness

(A) Remuneration Committee established theoretical basis
From the existing research, support the establishment of the theory of the Remuneration Committee has three levels of agency theory and equity theory.
A three-level agency theory
Principal-agent theory, in particular the three levels of agency theory (Tirole, 1986; Choe and Park, 2004) provides an important theoretical support for the establishment of the Remuneration Committee. In typical principal-agent model, the agent's conduct can not be confirmed, there is a potential moral hazard problem, at the same time as the principal shareholders and their agents - Directors, due to the lack of adequate supervision time and the necessary expertise can not be the agent The implementation of effective supervision. Single principal-agent model analytical framework can not effectively solve the agency problem. Tirole (1986) proposed the principal - the supervisor - agent (Principal-Supervisor-Agent) three-level agent model, the main points are: agent for the output of the main effort can not be observed; between principal and agent private information asymmetry, the principal task of the supervisory agent action authorized independent oversight; independent oversight of the person responsible for collecting agent action. From the model point of view, the main contribution of the three levels of agency theory is proposed supervision is authorized by the shareholders (the principal) to the independent watchdogs to constrain agent behavior through the action of the supervisor, to reduce agency costs. The Remuneration Committee under the authority of the shareholders to develop and oversee the executive manager remuneration plans, acts as a supervisor role. The Remuneration Committee's own characteristics than shareholders, it can more effectively perform their supervisory functions, checks and balances and a private action for disciplining managers. Mainly reflected in: (1) relatively independent Remuneration Committee. The Remuneration Committee constituted most of the non-executive directors, non-executive directors and corporate interests less, relatively independent and rational decision-making, Executive Manager of checks and balances to some extent and constraints behavior; (2) Remuneration Committee is more professional than the shareholders . Most of the members of the Remuneration Committee have a high professional skills, scientific assessment and remuneration plans. (3) The remuneration committee can also contribute to the establishment of companies to establish sound business evaluation system and salary system, the company's compensation plan more exciting and competitive, to stimulate behavior of the operators, so that they work in the Company's target range.
Equity theory
Equity theory (Equity Theory) Adams (1963) proposed a theory of motivation, the development and improvement also provides a theoretical basis for the establishment of the Remuneration Committee. Fair fundamental theoretical category: individuals are often concerned about the relative amount of own compensation was to determine the fairness and reasonableness of the remuneration received, and by comparing the result of the comparison of the personal rewards will affect future work practice. Compensation of personal most important comparison of horizontal comparison, that the individual will get the "reward" (including money, work schedules and get appreciated) with their "input" (including level of education, the efforts made for work the ratio of the time, energy, etc.) with others for social comparison, when the ratio is equal to or similar to, a talent that fair. If there is unfair, an individual may request for additional income or reduce the extent of their own efforts, may also be required to reduce their own remuneration or increase efforts, etc. to offset unfair unease pressure.
Organizational performance there is a certain ambiguity, accurate assessment of managers. Difficult manager remuneration is generally through social comparison to determine. There are two main reference for comparison: with the competition manager of the company's remuneration, the second is the level of remuneration of members of the internal directors and employees. As members of the Remuneration Committee by the company retired executives of other companies working managers and directors or business management experience of other non-executive directors, corporate competitive environment they are familiar with and most experienced professional managers in determining manager pay standard both accurately grasp the external market pay dynamic, but also to their own pay levels do horizontal comparison, remuneration policies developed to better reflect the principle of fairness. Both to avoid the remuneration is too high or too low phenomenon, but also reduce the sense of injustice manager remuneration and damage shareholder rights behavior.

(B) the effectiveness of the system of remuneration committee questioned
For the effectiveness of the remuneration committee set up (on behalf of the shareholders' interests), there are also a lot of questions. The representative scholars adhere to the model on the Rights of the manager. The model on the Rights of the manager core issue is the power obtained by the manager can affect their pay, in order to self-rent-seeking, leading to the signing of the Treaty of remuneration more to reflect the preferences of the CEO, rather than maximizing shareholder value. Resulting in sub-optimal incentives and detrimental to the interests of the shareholders. Based on the model on the Rights of the manager, even in the presence of the Remuneration Committee, the manager may also their influence to influence the decisions of the Remuneration Committee. This is mainly reflected in the one hand for the arrangements of the Remuneration Committee of the Board, the manager may influence the co-opted in their favor candidates; On the other hand, for the payment of remuneration of the members of the Remuneration Committee, the manager may by means of control for the payment of the remuneration committee, the members of the Remuneration Committee can not achieve real independence. In such circumstances, the Executive Manager (especially the CEO) to obtain an override power over the board of directors or the remuneration committee, then he will choose to lower incentive compensation package. In this case, as Williamson (1985) said "the independence of the compensation committee the existence of similar (Senior Executive Manager) to develop an employment contract with one hand, while with the other hand to sign it, remuneration essence, the Commission became so conducive to the implementation manager compensation plans to legalize a rubber stamp, the efficiency of the Remuneration Committee will not be reflected.
Another bidding theory (Bidding-up Theory) also questioned the effectiveness of the Remuneration Committee. The bidding theory (Bidding-up Theory) is mainly used to explain the price rise of English Auction auctioneer continue to raise prices until all other persons outside the Highest Bidder exit the auction date. The main points of the theory bid: bid, the winner final price paid by the other competitors bidding decision; the bidders tender prices are based on their true estimated on the basis of the opponent's bid to make corresponding adjustments; bidders any bids are weakly dominant bidding strategy. Ezzamel and Watson (1998) market study found that: in reality there is no such trend will rise relative to the market a lower level of remuneration of the managers of managers pay higher executive salaries, but relative to a corresponding drop trend. Based on auction theory, Ezzamel and Watson that the existence of this phenomenon is the result of the bid manager compensation among the members of the Remuneration Committee. : First, the the manager remuneration standards developed by the Remuneration Committee generally Remuneration Committee present or past pay levels and the average market wage levels for the minimum benchmark, the manager salary negotiations on this basis, similar bidding activity relative remuneration, the manager of the Remuneration Committee consultation instead of falling. Second, more cross-representation as a member of the Remuneration Committee, the manager of the company, executive and non-executive directors to attend the respective remuneration committee, likely to cause collusion between the executive and non-executive directors of the Remuneration Committee internal constantly improve
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