Can a decentralized power structure affect executive compensation? Evidence from Chinese business groups

Abstract

Using a unique sample of Chinese business group firms required by the government to disclose double financial statements to the parent and its subsidiaries, we examine the impact of a decentralized power structure on executive compensation and further test its mechanism. Our findings show that firms with a more decentralized power structure pay their group managers less, suggesting that such a power structure acts as a governance tool to mitigate astronomical salaries in the Chinese manager market. Additional analysis shows that management's bargaining power mitigates this negative relationship, whereas the information and competition environments reinforce this negative relationship. The main results are robust to an alternative decentralized power structure and executive compensation metrics, an instrumental variable approach, and propensity score matching. Furthermore, we document that firms with a decentralized power structure offer managers fewer stock options and less abnormal compensation, and managers respond by increasing the probability of leaving their jobs. Our results suggest that the allocation of decision rights determines executive compensation.