The effect of firm performance on CEO compensation: the moderation role of SOE reform

Abstract

As corporations expand, the owners (principals) delegate managers (agents) to manage their wealth on their behalf. Ceding the management authority to others means shareholders must institute mechanisms that keep their interests aligned with those of managers. One of such corporate governance mechanism that helps with the interest alignment goal is the compensation of Chief Executive Officers (CEOs). Although there are some previous studies on CEOs' compensation, results from these studies are mixed. Most corporate governance studies suffer from endogeneity problems. Resultantly, the current study uses the dynamic panel system generalized methods of moments (SGMM) estimator to examine the moderation effect of SOE reforms on the nexus between firm performance and CEO compensation using a sample of 1265 non-financial public limited companies on the China Stock Market from 2010 to 2016. The result from the study shows that both current and past firm performances positively influence executive compensation contracts. Although the Renewed Mixed-Ownership Reform was launched at the 18th National Congress of the Chinese Communist Party in 2012, its influence on executive compensation began to have material effect after issuing the operational guidelines in 2015. State ownership continued to decrease but remaining high only in strategic sectors. Finally, the extensive reforms positively influenced state ownership as an important governance mechanism in CEO compensation contracts after 2015.

Do institutional framework and its threshold matter in the sensitivity of CEO pay to firm performance? Fresh insights from an emerging market economy

“…This work is situated within the fabrics of three major theories, namely, agency theory, managerial power theory, and law and finance theory. First, following the divorce of managerial responsibility from possession in listed firms, agency theory stresses the importance of executive compensation as an internal corporate governance mechanism that matches shareholders' and professional managers' interests (Chukwuma et al, 2021; Wang et al, 2021; Yang et al, 2020). To prevent exploitation of avalanche of information gap which might be to the disadvantage of dispersed shareholders, the principal‐agent theory posits that executive compensation of professional managers should be tied and benchmarked to observable firm performance of listed firms (Ko et al, 2020; Tee, 2021).…”