Abstract
Executive stock option is an important methodto alleviate the agency problem between shareholders and managers. Since the introduction of employee stock option in China in the early 1990s, more and more listed companies have announced and implemented stock option plans in along with continuous improvement of institutional environment and capital market. Similar to monetary compensation, the optional compensation incentive across mangers could be variant, and the gap of monetary compensation and the gap of optional compensation are different. Then, what factors will listed companies consider when deciding the stock option disparity among mangerial team? Does the incentive effect of different stock option disparity also differ? The answers to these questions have critical meaning for the effectiveness of option incentive plan in practice.Traditional salary research found that there are two theoretical supportings for the incentive effect of the pay gap. In the tournament theory, the company regards the promotion of employees as a continuous tournament, and stimulates employees to improve their work effort by widening the wage gap between different positions. Behavioral theory, based on sociology and psychology, emphasizes that excessive salary gaps may lead to negative feelings of “unfairness” and “exploitation”, weaken employees’ work enthusiasm, and ultimately reduce the productivity and value of the company. Although these two theories provide different perspectives to understand the pay gap, unfortunately, such research is limited to the pecuniary compensation gap, and does not involve the stock optional compensation gap.
Using the listed non-SOE companies in China that have implemented executive stock option plans during the period of 2011-2016, as a research sample, this paper attempts to analyze and test the exeutive stock option compensation gap in firm performance based on the tournament theory and behavior theory. Specifically, there are two main research questions in this paper. First, this paper examines the influencing factors of the option distribution gap of executives from the perspective of team cooperation. Referring to the existing research literature, this paper measures executive team collaboration needs from four dimensions: diversification, enterprise risk, executive team size and technical complexity. The study finds that as the company diversification, corporate risk and executive team size continue to increase, the concentration of executive equity incentive share is reduced. This result shows that when the internal team cooperation is more important, the company is more likely to distribute incentives evenly among the senior management team in order to avoid the negative feelings of “unfair” and “exploitation” caused by the pay gap, which is consistent with behavioral theory.
Secondly, from the perspective of the company accounting performance and market value in the current and future period, this paper examines the performance effect of the executives' pay gap of stock option, and analyzes which gap is most beneficial to the company. The study finds that with the increase in the distribution gap of executive stock option, the current and future market value as well as accounting performance have significantly increased. This result is still significant after controlling for the endogeneity problem. Furthermore, the paper also finds two moderating effects. The higher the external stock option incentive intensity, the stronger the positive relationship between the concentration of the executive stock option shares and accounting performance. The higher the industrial competition, the stronger the positive relationship between the concentration of the executive stock option incentive shares and market value in the current and future periods.
In general, this paper consists of two main findings. First, in terms of influencing factors, Chinese non-SOE listed companies will consider the internal cooperation of the team when they allocate the opition share of the executives, which supports the expectation of behavior theory. In terms of incentive effect, the higher executive stock option pay gap is more favorable to the improvement of company performance and supports the tournament theory.
There are three contributions in this paper. Firstly, this paper discusses the applicability of tournament theory and behavior theory in the equity incentive system of listed private companies in China from the perspective of influencing factors and economic consequences. This is a significant and beneficial supplement and expansion to the existing research on salary incentive, especially the tournament theory and behavior theory. Secondly, this paper further analyzes the optional compensation system of non-SOE listed companies in China from the perspective of the distribution gap of executive stock option, thus enriching the existing research, providing scholars with a new and more comprehensive understanding of the executive stock option plan. Finally, the research findings of this paper may help non-SOE listed companies optimize their managerial compensation system in practice, and ultimately promote the sustainable and healthy development of China's capital market.
| Date of Award | 14 Jun 2019 |
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| Original language | Chinese (Traditional) |
| Awarding Institution |
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| Supervisor | Yaxuan QI (Supervisor) & Changjiang LYU (External Supervisor) |
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