Relative performance evaluation (RPE) is the process of comparing performance among workers, which is to reward employees’ performance based on the performance of the relative reference group. Taking the listed companies in China from 2001 to 2008 as a sample, Hu, Y.Q. and Zhou, H. [1] find evidences to support the use of RPE, when dividing companies in the same industry into the reference group and measuring the company’s performance by return on assets. Furthermore, the paper shows that the use of RPE in executive compensation contracts varies negatively with a firm’s level of growth options. Albuquerque, A.M. [2] also conducts a test whether growth-option firms should use CEO compensation contracts based on RPE. In general, for the reason that growth- option firms are in more volatile environments, the use of RPE can avoid exogenous shocks on CEOs and reduce the risk faced by them. However, for high-growth-option firms, it’s difficult to find peer groups which captures common risk exposure, thus the implementation effect of the use of RPE has been affected. The paper finds that high-growth-option firms rarely use RPE to evaluate the performance of CEO.

First of all, many scholars have done a lot of research on the compensation of employees and managers in the compensation system design, but few scholars have carried out in-depth research on the compensation of directors. In recent years, some scholars at home and abroad have creatively studied the considerations of directors’ compensation.

Equity-based compensation will link directors’ compensation to the long-term value of the firm, which is regarded as an effective way to design directors’ compensation. However, Drymiotes, G. and Sivaramakrishnan, K. [3] state that long- term incentives alone may not prompt directors to perform their role in supervising corporate executives effectively. Enterprises should also implement some short-term incentives for directors, especially using the same short-term measure used to evaluate managers. The combination of short-term and long-term incentives is more beneficial to enhance the effectiveness of the board on monitoring corporate executives. Zhu, T. [4] conducts a research about the influence of director’s compensation on CEO’s compensation, and finds that though both director’s supervision compensation and excess compensation and are positively related to CEO’s compensation, but the effects on firm’s future performance are dramatically different. The higher director’s supervision compensation is, the better the future performance is. However, the higher director’s excess compensation causes worse future performance. That is to say, the relationship between director and CEO is complicated, which could be supervision or collusion. Moreover, the effect of collusion is stronger than that of supervision. The results show that it’s essential to further clarify the differences in the functions of directors and CEOs, and pay attention to design the compensation that matches the supervisory functions of the directors, which is an important way to improve the performance of the company.

Many previous researches on compensation system design focused on the specific compensation design of employees and executives, and rarely involved in compensation system design at the organizational level. In recent years, many scholars have gradually paid attention to compensation system design from the angle of the organizational level.

Díaz-Fernández, M., López-Cabrales, A. and Valle-Cabrera, R. [5] suggest that the compensation system design should be matched with the corporate strategy. Taking manufacturing enterprises as a sample, the article finds that it’s because the compensation system design motivates employees to cultivate competencies matched with the corporate strategy that the compensation system design makes an enormous effect. In general, the implementation of corporate strategy requires employees to have corresponding competencies, thus the design of compensation system should be guided by these competencies. The compensation system design should be matched with the corporate strategy.

Bushardt, S.C., Glascoff, D.W. and Doty, D.H. [6] propose the design of compensation system should be consistent with organizational culture. Madhani, P.M. [7] shows that if the compensation system design is not congruent with organizational culture, it will easily lead to some adverse consequences. On the other hand, organizational culture which is matched with compensation system design will become a competitive advantage for the enterprise.

Some scholars in China have also studied the compensation system design at the organizational level. Xia, N. and Dong, Y. [8] propose that when designing the compensation system, enterprises should not only consider the absolute value and relative value of compensation, but also pay attention to the influence of specific circumstances of the enterprises on pay gap, such as the executive team’s collaboration needs, financial risk, technical complexity and firm size, etc.

Many scholars have studied the relationship between compensation system design and the performance of enterprises, and found that compensation has an incentive effect on performance. In recent years, many scholars have carried out in-depth research on the relationship between compensation system design and performance, mainly involved in the following three aspects: the in-depth research about CEO’s compensation; comprehensive consideration of the compensation of individual and team, employee and executive; the influence factors of pay-performance sensitivity.

As is mentioned above, the design of compensation system has an impact on performance to some extent. Specifically, compensation is an incentive factor of performance and a good compensation system design can help improve company’s performance. On the other hand, the design of compensation system is also likely to prompt employees or executives to exaggerate their performance in order to obtain higher returns. That is to say, it may lead to financial misreporting.

First of all, the possibility of financial misreporting under different compensation system design is different. Maas, V.S. and Van Rinsum, M. [18] find that when a manager’s performance has a positive influence on the monetary payoff of his peers, the manager is more likely to overstate his performance.

Moreover, some scholars also expand the research about the relationship between financial misreporting and equity incentive in compensation system, providing a new perspective on the study.

Some prior researches examine the relationship between financial misreporting and equity incentive and suggest that a manager whose wealth is more sensitive to the company’s stock price is more likely to overstate performance. Obviously the focus of these studies is the value of company’s stock. However, Armstrong, C.S., et al. [19] provides a different perspective. The risk of stocks is the volatility of stock returns. If the manager is risk-averse and financial misreporting will not only increase the value of stocks but also the risk of stocks, the manager is faced with a trade-off between risk and profit when making a decision to misreport. Unlike the conclusion of previous researches, the results of the article indicate that managers choose to exaggerate performance for the reason that their wealth is affected by the volatility of the stock returns but not the value of the stock. That is to say, in companies which implement equity incentive, it’s not the value of the stocks but the risk of the stocks that is closely related to the financial falsification of managers.

Jayaraman, S. and Milbourn, T. [20] also point out that detection mechanisms should be taken into consideration when studying the relationship between CEO equity incentive and financial misreporting. Detection mechanisms can mitigate the impact of equity incentives on misreporting by limiting the ability of managers to carry out such manipulative activities. In the paper, auditor industry expertise is used as a kind of detection mechanism. The results show that there is a positive correlation between CEO equity incentive and financial misreporting in the sub-sample of low auditor expertise. However, there is no corresponding correlation in the sub-sample of high auditor expertise. In other words, when there is no effective detection mechanism, CEO equity incentive will have a great impact on financial misreporting. This is also an expansion of the research about the relationship between equity incentive and financial misreporting.

In addition, Singh, R. and Larkin, I. [21] examine how performance-based compensation affects managers’ reporting behavior and the resulting stance auditors take when deciding whether to certify a manager’s report. They document that auditor’s conservatism helps improve the measurement of the performance, that is to say, the reported performance will be more real.

Some scholars in China have also conducted some research on the relationship between the design of compensation system and financial misreporting.

Deng, X.L., Chen, Y.S. and Chen, D. [22] find that the higher the degree of overlap between the Audit Committee and the Remuneration Committee, the higher the level of earnings management. What’s more, in companies with high executive compensation or large internal pay gap, the correlation between the overlapping degree and earnings management is stronger, and the correlation between executive compensation and manipulative earnings is stronger, suggesting that managers may collaborate with cross-serving directors to manipulate earnings to grab higher opportunistic remuneration. The results indicate that overlapping of committees is an important factor of executive’s compensation and misreporting behavior. Liu, X.M., Zhang, Y. and Wang, L. [23] document that the equity remuneration of the original top management team is positively correlated with the level of real earnings management, which indicates raising the equity compensation of the original top management team will induce real earnings management, resulting in financial misreporting.