Study on the Relationship between the Executive Incentives and Business
Performance in Listed Companies of Manufacturing Industry
Xiao-xuan Kou1, Ao-bo Dong2,Lei Zhang3
1
School of Business Department, Tianjin University of Commerce, Tianjin, P.R.China
School of Business Department, Tianjin University of Commerce, Tianjin,P.R.China
3
School of Business Department, Tianjin University of Commerce, Tianjin,P.R.China
(1kouxiaoxuan@126.com, 2aobo_only@126.com,3melody_zhl@126.com)
2
Abstract - This paper has chosen annual report data of
442 listed companies in manufacturing industry as research
samples, which were listed in Shenzhen Stock Exchange and
Shanghai Stock Exchange in 2010. This paper analyzes the
factors which affect the company's performance by using
statistical analysis tool spss18.0. We try to study the
correlation between executive incentive and business
performance, by using the hypothesis testing and linear
regression method. On the basis of the above studies, we
make a few suggestions about the executive incentives
combining with the new trend of today's social development
of listed companies to improve the corporate performance at
the end of the paper.
Keywords – company performance, compensation,
executive incentives, listed Companies
I. INTRODUCTION
With the development of global economic
integration, China's enterprises faced with unprecedented
challenges and opportunities. In recent years, the
development of China's listed companies is active, the
quantities of those companies are ever-increasing and the
company structure is also optimized continuously, more
and more scholars and entrepreneurs have focused on the
governance of the listed companies. There is information
asymmetry between consignor and agent in the process of
corporate governance [1]. How to incent executives to
maximize interests while pursuiting self-interests, that is
we should continue to explore and study.
In recent years, based on some mature researches of
foreign academics, such as "principal-agent theory" and
"stakeholder theory", scholars conducted localization
study. Zhang Kun and Cao Hengqi (2008) studied on
executive compensation incentive effect on the operating
results of the company of the wholesale and retail industry
[2]
. Duan Chunming (2009) studied the relationships of
executive incentive and external audit; Ge Chunyao
(2011) researches the effectiveness of executive incentive
of commercial banks in China, and so on. Due to different
study perspectives, the conclusions are not the same.
Based on the predecessors’ research results ,we
select the manufacturing industry which is more stable as
the study object and focus on the current incentives for
executive of listed companies, such as "which measures
are most effective? ”, “What degree of motivation is?”,
“How to set up an efficient executive incentive
mechanism?” and so on.
II. RESEARCH ASSUMPTION AND
FRAMEWORK
At present, most of reformed companies adopt the
model of shareholder governance, maximize the benefits
of shareholders, improve the business performance [3].In
numerous incentives most companies choose salary
incentive as the main incentive. In order to build up the
relation further between executive and company, many
companies take the company share as a means of
motivation, and achieved a very good incentive effect [4].
There are very few companies use restricted stock, stock
options, stock appreciation rights and other means, but
these methods practice relatively late, the range is small
and has no representative [5]. In order to learn more about
the performance of listed companies in manufacturing and
the relation between executive compensation and
executive shareholding, we will study the impact of
company performance which is conducted by different
salary groups and different ownership groups of stock by
using the method of Group Method of Regression.
Hypothesis1: There is positive significance
correlation between performance of listed companies and
executive compensation in manufacturing industry. There
is inconsistency of interest between shareholders and
managers according to the principal-agent theory. In order
to avoid the risk and cost which is raised by moral hazard
and asymmetric information, shareholders are likely to
sign the reward vs. performance contract with the
managers [6].Therefore, company performance and
managers' salaries are closely related. It is reasonable
for executives to get high salary though improving
performance.
Hypothesis2: There is positive significance
correlation
between
performance
of
listed
manufacturing companies and executive shareholding
ratio.
According to Maslow's hierarchy of needs theory,
executive will demand a higher level of motivation
when physical compensation being satisfied [7]. In
order to improve the level of motivation, executive
shareholding plans become a popular incentive for
listed companies in recent years.
III. RESEARCH SAMPLE AND THE SAMPLE
SELECTION
A. Sample Selection
We choose 612 listed companies in manufacturing
industry which issue A-share as original sample in
Shenzhen Stock Exchange and Shanghai Stock Exchange.
We collect data from the website of Shenzhen and
Shanghai Stock Exchange, Genius net and Database of
Guo Taian and so on. We also get rid of some
unreasonable data according to the following principles:
(1)Excluding listed companies which are marked ST,
*ST, S*ST, SST and PT for the badly performance, and
issued audit views by registered accountants of retained
views, refused to express views and negative views.
(2)This study mainly focuses on highly concerned Ashare listed companies. Because of the influence of
information disclosure if the A-share listed companies
issue B-share and H-share, we get rid of those A-share
listed companied which is issued B-share and H-share
meanwhile.
(3)Due to vulnerable abnormal fluctuations of
performance, and unsound internal operation mechanism,
the newly listed companies are not included in the sample
since 2008.
(4)The sample which is lack of relevant performance
indicators is rejected.
Based on the above principles, we selected a total of
442 listed companies as the ultimate study samples which
have perfect information and internal structure.
B. Variable definition and Research Model Definition
(1)Dependent Variable
We adopt the ROE as index of company performance.
ROE reflects the profitability of the company.
(2)Independent Variable
The first one is the top three executives total annual
salary，for the accuracy of datum，we take logarithms
on salary in the regression equation model. The second
one is executive shareholding ratio.
We will do group research for further understand of
effects of variables on the dependent variable. First,
according to the company's top three executives of the
distribution of total salary, the sample data is divided into
five groups: ①1 million below, ②1-1.5 million, ③1.5-2
million④2-2.5 million, ⑤2.5 million above. Second, the
sample data are divided into five groups in terms of
Executives shareholding ratio: ①0%, ②0%-0.01%,
③0.01%-0.1%, ④0.1%-10%, ⑤10% above. We will do
the regression analysis based on the above groups.
(3)Control Variable
Company size. Company performance is not only
influenced by management efforts, but also impacted with
management capacity and the available resources [8]. At
the same level of incentives and shareholding ratio, there
are companies of different size and performance. So，
company size is the control variable of the company
performance [9].
Independent Director Ratio. There is no direct
interest between independent directors and company. So,
independent directors are likely to take the benefits of
stock-holders at first, and do objective evaluation of
executive performance. This will indirectly affect the
company's performance.
State-owned Shareholding Ratio. In the company's
ownership structure, state-owned shareholding belongs to
the state, SASAC on behalf of countries to exercise
ownership, which led to the vacant of owner of Stateowned shareholding. No real owner directly led to
insufficient supervision of executive of listed companies.
The larger proportion of state-owned shareholding, the
less supervision of company executive and larger powers
of executive implementation [10].State-owned shareholding
ratio will affect the company's performance.
Number of Meetings of the Board of Directors,
Lipton & Lorsch（1992）point out that，the meeting of
the board of directors benefits and the fulfillment of
responsibility. And the stakeholder，directors could take
the interests of stock-holder first and protect their
interests，and then impact on company performance.
TABLE I
VARIABLES’ SYMBOL, MEANINGS AND DECLARATION
Variable
Type
Dependent
variable
Independent
variable
Variable
Name
Variable
Meaning
Variable Declaration
ROE
Company
Performance
Net
Profit/Average
Owner's Equity
Salary
Executive
compensation
Executive
shareholding
The top three executives
total annual salary
(Total
number
of
managerial
ownership)/(the number
of shares)
Total assets
SRatio
Asset
Company size
DRatio
The
independent
director Ratio
Control
Variable
FST
The proportion
of state-owned
shares
Num
Number of me
etings of
directors
(The
number
of
independent
directors)
/(The total number of the
Board)
(The number of stateowned shares)/(Total
number of shares)
Number of meetings of
directors
Build up model and regression equation based on
Hypothesis1 and Hypothesis2：
ROE   0   1 * ln( salary )   2 * SRatio   3 * ln( Asset )
  4 * DRatio   5 * FST   6 * Num  
ROE is the explained variable ， β0 is constant ，
β1,β2,β3,β4,β5,β6 are coefficients of explanatory variables，
μ is random error term ， the others are explanatory
variables.
C. Description of Sample Statistics
According to the data from 2010 listed
manufacturing companies, we do the statistics description
to each variables, Table Ⅱ shows the results.
It can be seen from TableⅡ, the minimum total
annual salary of top three executives of listed companies
in Chinese manufacturing industry is 145,900yuan which
is different to the maximum annual salary 8,067,500yuan
hugely. The standard deviation is 1101403.547, indicating
that there are large differences between the mean value
and the company's top three executives of the total annual
salary distribution.
TABLE Ⅱ
DESCRIPTION OF SAMPLE STATISTICS
N
Minimal
Value
Maximal
Value
Mean value
Standard
deviations
ROE
439
-9.911979
0.760529
0.07853312
0.489744946
lnSalary
442
11.890677
15.903354
13.7855133
0.731867156
SRatio
442
0.0000000
0.5587196
0.00762856
0.047745334
lnAsset
441
18.847228
26.156299
21.8712261
1.064026171
DRatio
442
0.2500000
0.571429
0.36425067
0.050288314
FST
442
0.0000000
0.682644
0.06630257
0.148661327
Num
442
3
38
8.64
3.960
Salary
442
145900
8067500
1276300.01
1101403.547
Data sources: Database of GuoTaiAn: http://www.gtarsc.com/
Fig. 2. Executive shareholding ratio histogram
Statistical analysis of the frequency percentage
which drawn from TableⅡ and Fig.2 shows that executive
shareholding ratio most companies (about 83.3%) of
manufacturing industry is zero. The highest executive
shareholding ratio is 0.5587, the standard deviation is
small, and the numerical distribution is relatively
centralized.
Ⅳ. EMPIRICAL ANALYSIS
Based on the above description, correlation analysis
and regression model analyses of sample data are
necessary.
TABLE Ⅲ
CORRELATION COEFFICIENT AND SIGNIFICANT MATRIX
BETWEEN EACH VARIABLE
ROE
ROE
1
lnSalay Sratio
lnAsset DRatio
FST
Num
0.169**
-0.005
0.083
0.030
0.020
0.013
(0.917)
(0.084)
(0.533)
(0.677)
(0.788)
0.061
0.018
0.151**
0.000)
(0.204)
(0.712)
(0.000)
-0.87
-0.039
-0.058
-0.10
(0.067)
(0.414)
(0.220)
(0.831)
-0.021
0.180**
0.156**(
(0.661)
(0.000)
0.001)
0.037
0.007
(0.440)
(0.886)
( (0.00)
lnSalary
1
-0.125** 0.364**(
(0.008)
SRatio
lnAsset
Drato
Fig.1 the top three executives total annual salary histogram
Fig.1 shows, the top three total salaries mainly
concentrate in on the range of 800,000yuan to about
1,500,000yuan. There is several one extremely high
salary. Salary standard deviation is large which indicates
that total concentration different.
FST
1
1
1
1
-0.023
(0.442)
Num
Note: * related to the 5% level, ** related to the 1% level
1
TABLE Ⅳ
CORRELATION COEFFICIENT AND SIGNIFICANT MATRIX BETWEEN EACH VARIABLE
Group
type
Model
Salary
group1
Salary
group2
Salary
group3
Coefficient
Coefficient
Coefficient
Salary
group4
Salary
group5
Coefficient Coefficient
Share
holding
group1
Coefficient
Share
holding
group2
Coefficient
Share
holding
group3
Coefficient
Share holding
group4
Coefficient
Share
holding
group5
Coefficient
-0.803
-1.133
-7.582
-0.524
-1.197
0.803
-1.494
-1.477
-0.356
-0.335
Constant
( 0.000)
(0.000)
(0.098)
(0.132)
(0.011)
( 0.000)
(0.171)
(0.008)
(0.703)
(0.831)
0.054
0.080
0.373
0.054
0.107
0.054
0.113
0.050
0.024
0.018
lnSalary
(0.000)
(0.000)
(0.031)
(0.074)
(0.001)
(0.000)
(0.088)
(0.024)
(0.748)
(0.748)
-0.034
-0.285
2.543
116.668
0.399
0.034
-140.76
228.819
-1.069
-0.071
SRatio
(0.770)
(0.581)
(0.839)
(0.767)
(0.213)
(0.770)
(0.915)
(0.009)
(0.436)
(0.709)
0.009
0.009
0.087
-0.011
-0.007
0.009
0.007
0.029
-0.019
0.018
lnAsset
(0.251)
(0.295)
(0.648)
(0.432)
(0.730)
(0.251)
(0.834)
(0.210)
(0.736)
(0.794)
-0.050
-0.117
1.099
0.403
0.130
0.050
-0.065
0.673
-0.373
-0.606
DRatio
(0.722)
(0.543)
(0.734)
(0.179)
(0.729)
(0.722)
(0.914)
(0.021)
(0.453)
(0.751)
0.009
-0.109
0.489
0.019
-0.233
0.009
0.104
-0.041
0.048
1.146
FST
(0.839)
(0.080)
(0.744)
(0.809)
(0.519)
(0.839)
(0.679)
(0.724)
(0.892)
(0.583)
-0.001
-0.002
0.000
-0.004
-0.007
0.001
-0.010
-0.006
-0.003
0.001
Num
(0.486)
(0.336)
(0.994)
(0.412)
(0.230)
(0.486)
(0.478)
(0.576)
(0.757)
(0.951)
R2 0.165
R2 0.071
R2 0.071
R2 0.359
R2 0.355
R2 0.165
R2 0.071
R2 0.071
R2 0.359
R2 0.359
F 7.425
F 0.647
F 0.647
F 1.585
F 2.930
F 7.425
F 0.647
F 0.647
F 1.585
F 2.930
(0.000)
(0.693)
(0.693)
(0.212)
(0.022)
(0.000)
(0.693)
(0.693)
(0.212)
(0.022)
From TableⅢ and TableⅣ, we can get conclusions as
below:
(1)There is a significant positive correlation between
the performance of listed companies of manufacturing
industry and the executive salary in the level of 1% that
shows that improving the company's executive salary can
significantly improve performance, Hypothesis1 is valid.
In five salary groups, total salary coefficient β1 always be
positive which is matches Hypothesis1 exactly. In the
salary group ①to ③variable coefficient is significantly
increases. It indicates that companies salary incentive
effect significantly when three executives of listed
companies totaled to two million yuan. The incentive
effect is decline but still effective when salary totaling
more than two million yuan. It can be seen that high
salary do good effect on executive incentives.
(2)There is a negative correlation between corporate
performance and the executive shareholding ratio,
significant (0.917) is very poor, this indicates that the
executive at shareholding and company performance have
no significant linear correlation which is different from
above result. Through the group regression study, the
executive shareholding ratio coefficient β2 present a
irregular jumping (-0.034, -140.76, 228.819, -1.069,
-0.071).As the increasing of the shareholding ratio. Only
when the executive shareholding ratio is in 0.01%-0.1%,
its coefficient is positive 228.819 significantly. It shows
that the company will receive a huge incentive effect
when company takes the measure of stock ownership
incentive in this case. But if shareholding ratio is below
or above of this scope, the coefficient is negative and is
not notable. Without prerequisites, the conclusion of
executive shareholding ratio and company performance
has significantly positive is obviously wrong. Hypothesis
2 is rejected.
(3)From TableⅢ, we can see that the relationship
between the control variable and company performance is
not significant. Size and proportion of State-owned
shares, the number of Board of Directors show a
significant sensitivity.
Ⅴ. CONCLUTION ANALYSIS AND SUGGESTION
A. Conclusion Analysis
This paper analyzes the annual reports of 442 listed
companies of manufacturing industry since 2010 through
total descriptive analysis. This paper also analyzes the
impact of performance which is conducted by executive
salary and executive shareholding ratio. Through a series
of empirical analysis, in the manufacturing industry,
salary incentive is significantly better than equity
incentive, and show a very good stability. Research found
that，in a certain salary range, performance increase will
be higher than the level of salary increase when raise the
level of salary. There is no regularity between executive
shareholding ratio and corporate performance. But it will
show a significant positive correlation in the context of a
certain proportion. This indicates that equity incentives
mechanism was premature.
Therefore, companies can design a well-designed
incentive mechanism and receive a better incentive effect
in the future.
B．Suggestion
(1) Perfect the Incentive Mechanism Further
Salary incentive is a common approach. Senior
management staff will realize their value with higher
salary. The phenomenon of exeuctives gets stagnancy and
slack with a higher fixed salary suggests that short-term,
high fixed income evoke inertia [11]. So, unfixed, larger
changed bonus should be enhanced in the incentive
mechanism. It is also feasible to increase executive
responsibility, improve the social status and ability and
promote the executive physically and mentally [12].
(2)Focus on the Effect of Equity Incentive
TableⅣ shows that equity incentives in a certain
range effect on company performance significantly.
Equity incentives not only enable executives to enjoy
normal high salary and bonus, but also can share profits
due to share size and grow with the company in a long
term to realize the value [13].
(3)Establish Long-term Incentive and Restraint
Mechanism
It is vital to balance relations of executive incentive
and company short-medium-long term goals. This is
because excessive short-term incentives can stimulate to
take short-term management action, and damage the longterm interests of enterprises [14].But focusing on the longterm interests of the company and ignoring the interests
of executive would make the executive lack of
enthusiasm, and that could lead long-term objectives fail.
Therefore, there must be a general short-medium-long
term incentive plans to formulate executive incentive. It is
necessary for outstanding executive to develop and award
benefit. This is also essential for solving the problem of
persistence and availability of the executive incentives.
(4)Focusing on the Combination of Incentives and
Corporate Culture
Corporate culture impacts on executive performance
effectively. There are two cultural factors: one is the
corporate history and traditions, especially the policy
history which is about corporate incentives for executive;
the other is the concept of corporate culture. Incentive
system should have continuity as far as possible. The
reform of incentive system should be constructed step by
step, and try to avoid huge changes [15]. Let the new
incentives and incentive ideas gradually formed a new
habit, and then new executive incentive system can be
truly implemented and operated properly.
ACKNOWLEDGMENT
This thesis is supported by the project
“The Research on the Contribution of Corporate Culture
to Competitiveness
Based on Corporate Social Responsibility”, which is
supported by Ministry of Education(MOE).Project
contract number: 10YJA630076.
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