How ownership and corporate governance influence chief executive pay in China's listed firms

Abstract

This article contributes to the international corporate governance literature by examining factors that affect CEO compensation in China. The article develops models of CEO pay based on an understanding of the unique economic and structural reforms undertaken by the privatized State Owned Enterprises. The findings show that CEO compensation depends, in part, on the firm's operating profits and this indicates that incentive systems are being used to motivate top managers. Corporate governance factors have a significant impact on CEO compensation, but they do so in ways that differ from those in other countries. The conclusions are robust across different formulations of the basic model and they have public policy implications for China and other transitional economies that are moving away from state ownership of business enterprises.

Executive perks: Compensation and corporate performance in China

“…As a result, SOEs are predicted to pay less cash compensation. This hypothesis is supported by previous studies on compensation, e.g., Firth, Fung, and Rui (2007). Although SOEs are found to pay less cash compensation, the relationship between perks and state ownership may be more subtle.…”

“…Current or lagged accounting numbers and stock returns are often used as measures of performance. Consistent with the suggestion to use incentive pay to solve agency problems, the cash compensation level in China is found to increase returns on sales (profit/sales) (Mengistae & Xu, 2004), (lagged) returns on assets (ROA) (Conyon & He, 2008;Firth et al, 2007;Li, Moshirian, Nguyen, & Tan, 2007), and (lagged) stock returns (Conyon & He, 2008).…”

“…Researchers (e.g., Firth et al, 2007) generally argue that pay for performance will solve the moral hazard problems between the principal (owner) and the agent (manager). However, pay for performance may also help solve principalprincipal agency problems (Young et al, 2008).…”

“…However, due to the communist legacy and the social equity pressures, SOEs are expected to pay less cash compensation, possibly to avoid criticism from the public (Conyon & He, 2008;Firth et al, 2006Firth et al, , 2007Li et al, 2007). In non-SOEs, which are mostly family businesses, there should be less pressure regarding the amount of executive compensation.…”

Recent Developments in Corporate Sustainability Reporting in China

“…Firth et al (2007) show that perks constitute an important remuneration component. They identify two functions of perks: To provide incentives to managers as well as to establish an environment of appreciation that facilitates work.…”