Regulating Executive Compensation in China: Problems and Solutions

Abstract

Executive compensation is an essential element of a corporate governance system and an issue of public concern and academic debate. However, the existing literature on executive compensation has primarily focused on the United States, United Kingdom and continental European jurisdictions. This paper presents a comprehensive comparative study of the law and practices of executive pay in China. It critically examines the processes that produce compensation arrangements, as well as the various legal strategies and market forces that act on these processes in the context of China.Based on extensive empirical evidence, it finds that excessive pay in China is less prevalent than that in the United States. Nevertheless, Chinese executive compensation is not optimal in that there are both excessive executive pay and low levels of equity incentives for executives in Chinese listed companies. Meanwhile, executives of state-owned enterprises are largely compensated by on-duty consumption, grey income and political reward.The article argues that the fundamental problem of executive pay in Chinese listed companies lies in the internal defects of its unique governance institutions, as well as the prevalence of concentrated state ownership in listed companies. It concludes that the primary role of Chinese * Assistant Professor, Faculty of Law, National University of Singapore; Visiting Scholar, Stanford Law School and the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University (2012)(2013) law in regulating executive compensation should not simply be to curb excessive executive pay, but it should be to improve the regulatory structure for setting executive pay in a fairer and more transparent way. To achieve this, regulatory strategies, especially heightened disclosure and strengthening the independence of the compensation committee, must be taken.

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“…In the last decade, the European Union has set a limit to salaries in the banking sector, Switzerland has given shareholders a binding say-on-pay vote, and the U. high incomes and announced an agenda to pursue "common prosperity". 19 However, the literature does not always support curbing executive compensation, as it can be ineffective or lead to unintended consequences (Bae et al, 2021;Lin, 2014): "The goal of pay reform should be to incentivise leaders to create long-run value for society, rather than reduce the level of pay" (Edmans, 2020).…”

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