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f the board of director is to mitigate agency cost by reducing the conflict of interest between shareholders and managers. Managers are likely to be risk-averse, but shareholders prefer relatively high risk, but positive NPV project; hence, the alignment of interest between two parties plays a key role in improving performance. As a result, the board of directors will design an optimal contract to align the interest between both of them.

Chapter 5: Summary and conclusion结论和总结

This study contributes to the literature and theory on CEO pay by analysing data from non-financial industry. My main purpose is to examine whether the cash and total compensation related to firm performance.
I observe the literatures; agency theory and empirical studies do provide much help in examining and explaining the pay-performance relationships. On the one hand, agency theory assumes compensation be the main mechanism to help the alignment of the interest between shareholders and managers. On the other hand, managerial power theory suggests CEO pay, can gain from CEOs’ own power and thus irrelevant to performance.
I analyse the cash compensation and total compensation of CEO from a large sample of firms in non-financial industry over the period 2004-2009. I find statistic evidence that both cash and total compensation are positively associated with firm performance through the regression analysis. Since a concern exists on which performance measure is proper, thus I apply three measures－ two accounting-based measures (ROA, ROE) and one market-based measure(ret). Furthermore, I apply several determinants into regression to analyses which factors play an important role in the determination of compensation, such as size, investment opportunity, leverage, age, tenure. I conclude leverage and firm size always determine the compensation over all the period. In order to test the robustness of the result, I implement an elasticity analysis, which prove a consistent result. Therefore, the finding is consistent with optimal contract view on agency theory, which implies, high performance gain high pay.
Some limitations of this study deserved to note so that these issues can be addressed in future research. For instance, the time interval is too short, only six years; this may not be adequate representation of the reality. One-year lag performance is not adequate to explain total compensation effect. Some corporate governance factors should contain in the regression model as control variable, it is interesting to see if the addition in this variable would, especially less-effective governance environment, can change my result.
From the small sample analysis, the relationship between the CEO compensation and the corporation performance is confirmed from the financial companies. And the relationship is not a fixed one but with a period varieties character. However, the description analysis and the non-parameter method are carried out in this part and the two methods isn’t a stable one but the effect to compare the companies in CEO compensation efficiency.
Finally, subsequent firm performance should contain in the discussion of pay-performance relationships.

Reference:文献

Barber, W.R., Janakiraman, S.N.,& Kang, SH. 1996. Investment opportunities and the structure of Executive compensation. Journal of Accounting and Economics. 21: pp.297-318.
Baker, Malcolm. &a