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Evaluation of performance of listed companies with the executive pay system design

Author: HeYiQiang From: www.yourpaper.net Posted: 2009-04-03 01:18:08 Read:
[Abstract] In this paper, the relevant literature review, corporate performance evaluation method - Balanced Scorecard approach, economic value-added of the design ideas of the executive pay system, to establish an effective system of executive compensation reference.
[Key words] performance evaluation remuneration system design

With the reform of property rights system and the establishment of modern enterprise system, the performance of listed companies executive compensation management has been a hot issue of academia. Especially since the late 1990s, some listed companies executive compensation and ordinary workers average income gap getting bigger, how to reform the remuneration for senior executives of listed companies has become imperative.
First, the relevant literature review
Corporate performance and executive pay, Western academia has done more empirical research. The earliest studies Taussings and Baker (1925) found little correlation between corporate executive compensation and corporate performance. Baker, Jensen and Murphy (1988) further pointed out that the sensitivity of executive pay on corporate performance is too low, that it can not provide effective management incentives, political forces will weaken the relationship between CEO pay and corporate performance. Jensen and Murphy (1990) that the remuneration of executives and shareholders to maximize benefits associated, but usually only holds all the shares of the company as CEO in a very small part of, and changes in shareholder wealth only a small sensitivity of CEO compensation. Meh-ran (1995) randomly selected from 1979 to 1980, the 153 companies in the manufacturing industry in the pay structure, noting that the form of remuneration, rather than the level to better motivate executives to increase the value of the company, the performance of the company and interest-based management The percentage of equity held by the percentage of the salary and executives are related. While of Aggarwal and Samwich (1999) found that with the increased risk of corporate performance, corporate executives pay sensitivity dropped significantly, and is close to zero, pay to corporate performance is almost irrelevant. Cheng and Warfield (2005) found that a large number of stock options held intention to subsequently sell more stock executives are more likely to be the company's financial report earnings manipulation. Denis et al (2006) study found that corporate executives there was a significant positive correlation between the equity incentive-based compensation mechanisms they have been allegations of fraud.
The domestic research began on corporate performance and executive pay in recent years, more representative of the study: Zhan Wang, strong use of managerial ownership and performance of the company in 1997, listed companies in China conducted a statistical analysis and found that listed companies control officers have an average of shareholding 0.0488%, the correlation coefficient is only 0.0052 does not exist on the statistical significance of correlation. Weygand listed companies sample of 816 A-share listed companies, the 1999 annual report of the Managerial Incentives and Firm Performance relationship, that the annual monetary income of the senior management of listed companies in China is low, the reward structure is irrational, reward form a single, the zero compensation zero holdings serious, there was a significant positive correlation between the level of executive remuneration and the number of holdings with the company's operating performance is not. Zengquan Li (2000) argues that the level of remuneration of senior management and the number of holdings with the company's operating performance is not there is a significant positive correlation. Jing Aimin Xu Wei (2003) analysis of the remuneration of the senior management of listed companies and company operating performance, executives of listed companies in China annual rewards to corporate performance is not there was a significant positive correlation between listed companies in China The control officers stake and results of operations of the Company there is no significant positive correlation. Zhu Qixiang and Lu Junyi (2005) found through empirical analysis of the remuneration of senior executives and corporate performance of listed companies, showing a positive correlation between business performance and the remuneration of the operators, but the correlation is not strong. Wangpei Xin et al (2006) also confirmed the annual salary with the company executives of listed companies was more significant, stable weak positive correlation between the indicators of operating performance and the size of the company. Zou (2007), the use of empirical data of listed companies in China to examine the senior managers salary increases and operating results of the Company to improve the relationship between research results show that, the the remuneration growth rate of the executives of listed companies is much higher than the growth of the performance of the company, salary increases and performance of the company correlation between the obvious.
Second, the performance of listed companies assessment methods
With the establishment of modern enterprise system and the development of capital markets, listed companies continues to grow. Overall poor performance of China's listed companies, financial fraud is serious, in the case of the absence of regulation, reform of the corporate governance performance evaluation method is imminent. Some evaluation method based on the conventional evaluation method, the Balanced Scorecard method, economic value-added method.
Scorecard method
Balanced Scorecard by Robert S. Kaplan (Harvard Graduate School of Business School of Management Professor of Finance) and David P Norton (Rehabilitation Programme Officer) of the company both in the summary of a number of performance measures in a leading position in the company based on the experience, invented in 1992 and the promotion of a strategic performance management tool. Balanced Scorecard layer by layer decomposition of the corporate strategic objectives into specific, mutually balanced performance evaluation index system, and these indicators to achieve the status of different periods of assessment for the completion of the corporate strategic objectives and establish a reliable Run-based performance management system. Its core is a measure of the agency's performance through a variety of "balanced" perspective, quantifiable indicators reflect operating conditions, the formation of the the enterprise evaluation by four aspects four indicators, financial indicators, customer satisfaction index, internal process indicators, learning and innovation-driven four indicators between causality.
Balanced Scorecard is superior to the traditional performance evaluation is that it breaks through as the only indicator of financial measurement tools to identify metrics including financial and non-financial indicators, linked to the performance and results of operations, enabling businesses to understand the financial results, to supervise the progress of the enterprise development capabilities, enabling businesses to overall consideration of all key performance areas, a two-way performance improvement cycle between the strategies and goals. Its main disadvantage is how to achieve the dynamic adjustment between the corporate strategic goals and the goals of the strategic business units, on this issue has not yet formed a complete theoretical framework, as well as each index weight how to set up, as well as subjective weighting human factors are difficult to overcome. Nevertheless, the survey showed that 80% more or less balanced scorecard approach is being applied in the Fortune 500 companies.
Economic value-added method
Economic Value Added (EVA) is a consulting firm in the United States - Stern Stewart (Stern Stewart) as the evaluation of corporate performance in 1991, the 1990s developed into a new performance evaluation method. The economic value added is the net operating profit after tax minus the opportunity cost of capital income is the income remaining after all costs are deducted, is the after-tax operating profit minus the cost of debt and equity capital.
Currently, EVA is a measure of business performance is the most accurate scale, compared with the traditional accounting profits, focusing on capital costs, to more accurately measure and reflect the wealth of the shareholders, more truly reflect the business performance. If EVA performance is continuously increasing, it indicates a continuous increase of the company's market value and shareholder wealth continued to grow. It measures the the enterprise profit gained hurdle is higher than investors expected.
The main advantage of the EVA method is the cost of equity capital into the performance evaluation system, to overcome the traditional accounting indicators to ignore the defects of the cost of capital, can really reflect corporate performance. The use of the capital asset pricing model, using different cost of capital for the different risk assets. However, EVA indicators there are some limitations: (1) EVA emphasis on practical results, makes managers reluctant to invest in innovative new products or training to develop new techniques; (2) the calculation of EVA adjustment procedure is more complex and not cost-effective principles; (3) EVA accounting adjustments to be too difficult, only as specific annual short-term performance evaluation, does not consider the time value and risk factors, is not conducive to enterprises of different sizes between performance comparison .
Third, the executives of listed companies pay system design
Executives of listed companies in China pay structure is relatively simple, they use a form of salary plus bonuses or annual salary system, income and short-term performance-related holdings is generally not. Wages in general has nothing to do with the executive's performance, performance-related bonuses and operators, will evaluate and reward operators conduct of operations over the past year, that is easy to breed corrupt conduct, short-term behavior or manipulative behavior, leading executives behavior of short-term , also lead to the domestic executives "59-year-old phenomenon," one of the reasons why.
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