Compensation Regulation and Perquisite consumption in China SOEs

Compensation Regulation and Perquisite consumption in China SOEs Donghua Chen, Shanghai Univ. of Fin.&Econ. Xinyuan Chen, Shanghai Univ. of Fin.&Econ. Hualin Wan, Shanghai Univ. of Fin.&Econ. International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Motivation: Joseph International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Joseph’s history • Joseph told us that he was not a good soldier when he was young in Taiwan. • Why? • No personal preferences, low pay, and can not buy the rights to exit • So? • More time spent on sleeping and on the way home. International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Implication from Joseph’s experiences • When the contract is given and you do not have freedom to choose, your behavior is endogenously determined. • Or, agency costs are ex ante determined by contracts. • Or in brief • Freedom does affect efficiency International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Research Question • When managerial compensations could not be freely contracted and they are set by governments uniformly, what will happen? • Does it induce higher perk? • Does it affect the efficiency of compensation contract? International conference on corporate governance in China and Asia,Shanghai, China,March 2005

government shareholder control Agency Costs SOEs Management Utility function Utility function Compensation contracts Regulated Monetary compensation (Salary, bonus and stocks) Stakeholder’s wealth maximization Substitution contracts ＋＋ perk ＋＋ Still black box Multi-objectives (employment, et al) Supplemental contracts Others (Political promotion, et al) International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Compensation regulation in China • Link the monetary compensation of senior managers with the average level of employees in SOE. • 1 to 3 times of the average level of employees, 1986 • Relax a little, 1988 • The stocks held by senior manager should be limited to 5 to 15 times of the average level of employees, 2000 • In practice, the monetary compensation of senior managers is 3-5 times of the average level of employees in SOE (Zhu, 2003 ) International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Why compensation regulated in SOEs? Information asymmetry Firm’s multi-objectives induced by government policy burdens and benefits make firm performance even more ambiguous No rights to exit International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Literature review • Berle & means, 1932; Jensen & Meckling, 1976; Alchian & Demsetz, 1972 • 林晓婉等，2001; 樊炳清，2002; 李增泉, 2000; 将业绩与经理层薪酬激励相联系 • 颜剑英, 2002：货币报酬偏低及声誉、职业升迁激励的异化导致经理自我激励泛滥 • 赵文红等, 1998：国有企业经营者与非国有企业（尤其是私营企业）收入差距过大 • 张仁德和韩晶, 2003：国有经济两大等级体系的委托代理链中第二等级的委托人和代理人共谋租金的结果。 International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Data and sample International conference on corporate governance in China and Asia,Shanghai, China,March 2005

How to measure perk? • Administration fee (办公费)、Business trip (差旅费)、Business hosting (业务招待费)、Communication (通讯费)、Oversea training (出国培训费)、the expense of Board (董事会费)、Cars (小车费) and the expense of meetings (会议费) International conference on corporate governance in China and Asia,Shanghai, China,March 2005

International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Relative pay • The average pay of senior managers / the average pay of employees International conference on corporate governance in China and Asia,Shanghai, China,March 2005

The empirical evidence for compensation regulation existence International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Model 1 International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Model 2 International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Contributions and conclusions • The first paper to study compensation in China from the perspective of regulation. • Compensation regulation leads to more perquisite consumption and weaken the efficiency of compensation contract in SOE. • Agency costs are ex ante determined by contracts. • Freedom does affect efficiency • Listening to Joseph’s history is worthy International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Thank you International conference on corporate governance in China and Asia,Shanghai, China,March 2005

Compensation Regulation and Perquisite consumption in China SOEs