Estimation of bargaining effect in the decision of monetary compensation of executive in investment bank: Evidence from China

Abstract

Though numerous empirical and theoretical studies have been conducted on the determinants and effects of executive compensation, empirical evidence regarding the bargaining effect on the monetary compensation decisions of executives, especially in a large emerging economy such as China, remains scarce. In this study, a two-tier stochastic frontier and endogenous correction model was developed to quantitatively estimate the bargaining effect on the monetary compensation decisions of investment bank executives. Our study is the first to provide comprehensive empirical evidence that bargaining between investment banks and executives in China significantly affects the compensation decisions of executives. In the bargaining process, investment banks are more proficient than executives, and the comprehensive bargaining effect tends to lower the negotiated compensation of executives. The bargaining effect exhibited obvious heterogeneity in the characteristics of executives and investment banks. When these characteristics tend to augment the bargaining power of executives, the negotiated compensation exhibits a limited decrease; when these characteristics augment the bargaining power of investment banks, the negotiated compensation decreases substantially. Our results provide deep insight into factors that determine executive compensation and help compensation designers of investment banks better understand and design executive pay packages.