Compensation Incentive of Executives under the Situation of Synergy or Mutual Exclusion of Corporate Profit and Innovation Tasks: Based on Incentive Game Model between Principal and Agent

Abstract

Based on the synergistic or mutually exclusive relationship between corporate profits and innovation tasks, such that shareholders can predict these two scenarios, this study constructed a multitask principal-agent mode considering “the degree of synergy or mutual exclusion between profit and innovation,” “salary reduction penalty,” and other factors. Based on mathematical logic, we determined the correlation and influence of synergistic or mutually exclusive degrees on executive profitability compensation and salary reduction penalties. Based on the 2016–2022 annual reports of A-share listed companies registered in Shanghai and Shenzhen, China, this research empirically verifies the effects of the aforementioned degree of synergy and mutual exclusion on managers’ compensation incentives. The research conclusions are stated as follows: (1) If shareholders can predict the synergy between profitability and innovation activities, then the salary reduction penalty (representing executive compensation stickiness) exhibits a significant negative correlation with the degree of synergy μ, whereas if the coefficient of executive profitability compensation βi (compensation sensitivity) bears a moderately positive relationship with μ, the shareholders will, to a certain extent, improve the performance-sharing coefficient of senior executives and reduce the penalty coefficient of salary reduction to increase the overall income level of senior executives via the incentive effect. (2) If shareholders can predict the mutually exclusive effect of profitability and innovation activities, the salary reduction penalty (representing executive compensation stickiness) is significantly positively correlated with the degree of mutual exclusion μ, whereas the coefficient of executive profitability compensation βi (compensation sensitivity) negatively affects the degree of synergy μ to a certain extent; however, this negative relationship is not prominent. This indicates that to avert the short-sighted behaviour of executives, shareholders will drive them toward investing in innovation by reducing the profitability compensation coefficient as well as increasing the innovative compensation coefficient. Simultaneously, the shareholders will increase the penalty coefficient of salary reduction to urge the executives to strengthen the operation and management of other profitable activities of the enterprise to maintain short-term performance at a reasonable level. (3) If shareholders cannot predict the synergy between profitability and innovation activities, they will attribute the source of excess earnings to the efforts of the senior executives. In particular, a greater degree of synergy is more likely to reduce the penalty for the senior executives. If the shareholders cannot predict the mutually exclusive effect of profitability and innovation tasks, the correlation between the penalty coefficient of salary reduction and the degree of mutual exclusion is related to the decline in performance. In such a scenario, the shareholders attribute the short-term deterioration in corporate performance to the negligence of the senior executives in corporate operations. Consequently, they urge senior executives to seriously operate the enterprise by increasing the penalty for senior executives. If the decline in performance exceeds the critical value, the shareholders will effectively motivate the senior executives by reducing the penalty coefficient of their salary reduction and moderately increasing their profit-making compensation sharing coefficient to avoid negative investment or their resignation.