Cost of Equity Capital and Executive Compensation Incentive:——A Theory of Executive Compensation Reform

Executive compensation system,based on the accounting performance,is the mainstream today and has been widely utilized worldwide. But more and more research evidence suggests that the relationship between executive compensation and accounting performance is insufficient to be the theoretical basis of executive compensation system. Therefore,this paper proposes that only when executive compensation incentive schemes follows the principle of shareholder wealth supremacy can it not only meet the expectations of the executives on compensation,but also fulfill the goals of shareholder wealth maximization on the premise of the firm's sustainable development. Cost of equity capital is the basic factor and core parameter in the designing of executive compensation system.