The Regulation of Executive Compensation in China

Abstract

According to agency theory, directors or managers do not bear all the consequences of their decisions as they do not own all the shares of a corporation. From that perspective, it is necessary to establish various types of market and contractual mechanisms to motivate or monitor the agents so that they will better align their interests with those of the shareholders. Among these mechanisms, executive compensation is a very important means to achieve this objective. This article discusses the regulation of executive compensation by tax law and the law of disclosure in the U.S. Judged by the efficiency criterion, discussion of the amount of compensation is meaningless and any attempt to provide a legislative, administrative or judicial standard is counterproductive. The emphasis of regulation should be focused on how to strengthen the correlation between executive compensation and corporate performance. Comparatively speaking, the disclosure regulation is more conducive to a market economy and beneficial to the improvement of capital market. To implement in China an executive compensation system, which ties executive compensation with corporate performance, the law must facilitate the methods of financing such compensation ex ante while severely penalizing insider trading, market manipulation, and exploitation of minor shareholders ex post.