Abstract
China has achieved impressive economic growth since market reforms. The design of appropriate compensation structures is imperative so as to incentivize top managers, but little research has been done to examine the top management compensation structure in China. This study investigates how listed firms in China relate executive compensation to their firm performance and how such relationships are influenced by firm ownership structure. The results provide evidence showing strong link between compensation and performance varies across firms with different ownership structure. Private ownership enhances the link between firm performance and top CEOs compensation, while government ownership weakens executive pay-performance relation and thus makes the firms less effective in solving the agency problem between shareholders and management. It suggests enterprise reform in China will need to be supplemented by change in ownership structure in order to ensure fully success by transforming its State Owned Enterprises (SOEs) to corporations in the direction of converting state shares to public shares.
Highlights
Compensation and incentive structures in China’ listed firms are crucial in determining the success of enterprise reform in China, yet they are not well understood so far
The coefficient on long-term debt ratio is positive and significant. It implies that higher long-term debt ratio attribute to higher vega
In this study I seek to shed some light on top management pay and how corporate governance mechanisms affect CEO compensation in listed firms
Summary
Compensation and incentive structures in China’ listed firms are crucial in determining the success of enterprise reform in China, yet they are not well understood so far. The design of appropriate compensation structures is imperative so as to incentivize top executives. There is little research on how these corporations operate. Listed firms in China has rapidly grew, significant portion of these firms are still controlled by the government. Government shares still dominate the ownership structure in most firms. This casts doubt on efficiency as well as effectiveness of China privatization reform. It’s crucial important to explore how these firms align top executive compensation and firm performance and how such relation are impacted by the ownership structure
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