Agency problem and CEO incentive of chinese private real estate company: the case of Sichuan Blue Ray Company

Abstract

After many years’ development, selection channels of professional managers have become diversified in China’s real estate sector. However, comparing with the market economies, market of Chinese professional managers is still immature. Supply and demand is not balanced in selection and recruitment market, reflected as demand exceeds supply. Information transmitting and identifying by social and market systems are incomplete. Market evaluation of professional managers’ qualification and reputation is under-developed. Therefore, CEO selection cannot be completely solved through market approaches. A company should establish a valid CEO selection and incentive system according to its specific demand. Based on the practical background, the thesis takes agency problem and CEO incentive in Chinese private real estate companies as the research problem. It is aimed to provide exploratory solutions to the agency issue and expected to give implications to CEO selection and incentive practice in Chinese private real estate companies. The thesis applies research findings in incentive theories, in both economics and management, following the research paradigm of principal-agent theory. Theoretical foundation is built on principal-agent theory, contract theory and information economics. Single case study is the research method. The top one real estate company in Sichuan province - Blue Ray Company is selected as the study case .In 2006, the company owner and founder decided to introduce professionalization and handed over the management to a professional manager. Since then, the company has been experienced difficulties in CEO selection and alignment of interests of owner and CEO. The thesis focuses on four research questions in Blue Ray: occurrence of the principal-agent problem, competency-based CEO selection, CEO's superstar effect in value creation, and input-based CEO incentive. Data collection includes primary data and secondary data. Primary data is collected through questionnaire survey and in-depth interviews; secondary data is from macro-economic data, real estate sector data, and company internal data. Data processing is conducted both qualitatively and quantitatively. The thesis develops conceptual models and theoretical models to solve the CEO selection and CEO incentive – the two crucial issues in agency problem, respectively solve the CEO’s participation constraint and CEO’s incentive compatibility constraint. Although the research findings should be cautiously generalized due to the limitation of single case study, outcomes like the “Two-stage model of CEO selection” and the “Three-stage model of CEO incentive combination” provide valuable theoretical and practical contributions to solve the agency problem, CEO selection and incentive in particular in Chinese private real estate sector.