Abstract
A significant portion of CEOs in publicly-listed Chinese state-owned enterprises receive zero pay from the companies for which they work. Instead, they are paid directly by their controlling shareholder, which can be the Chinese government or parent firms that are controlled by the Chinese government. We explore how these “unpaid” executives are motivated and whether the outcomes of this unusual incentive mechanism differ from the conventional approach. Consistent with career concerns as their main incentive mechanism, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. This result holds when we look at sub-samples in which individual CEOs switch payment regimes. We also find that compared to their peers with paid CEOs, firms with unpaid CEOs in general have higher return on assets, higher asset turnover, higher asset growth, and engage in less tunneling. To mitigate concerns of that our results are driven by CEO selection and to further investigate the use of implicit incentives, we conduct an event study using the Split Share Structure Reform in 2006. The Reform liberalized the Chinese stock market, thus strengthening the role of the market as an incentive mechanism. This mechanism provides a potential replacement for promotion incentives. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform.
Highlights
A surprisingly high portion of the executives of publicly-listed Chinese state-owned enterprises (SOEs) do not receive any compensation from the firms for which they work
Unpaid CEOs have an average tenure of 4.467 years at their firm, which is similar to the average tenure of paid CEOs (4.558 years). 77.4% of unpaid CEOs hold job title in the parent company of the listed firm, which is significantly higher than the 45.8% for paid CEOs
We find that Nopay is positively associated with ΔAsset, which is significant at the 1% level, implying that an unpaid CEO is associated with 3.4% of growth in the company’s asset growth
Summary
A surprisingly high portion of the executives of publicly-listed Chinese state-owned enterprises (SOEs) do not receive any compensation from the firms for which they work. Compared to their peers that are directly paid by the publicly-listed companies, compensation of the unpaid executives can be significantly lower in level and contains very few performance-based incentives.2 This means that the SOEs likely use strategies other than typical explicit incentive schemes to motivate the CEOs to perform. Our results indicate that the Reform has a negative impact on strength of career concern incentives of SOE executives and that subsequent to the Reform, firm performance differences between companies with paid and unpaid CEOs narrow. Gibbons and Murphy (1992) find that the general sensitivity of the executive’s pay is significantly stronger for those who will retire soon than for those who still have many years to go before retirement This is because younger executives have strong career concerns and can be motivated without performance-based pay. These factors make the Chinese market an interesting setting in which to study the use and effectiveness of implicit incentives
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