Abstract
This article tests several predictions of tournament theory on executive compensation in the context of a transition economy. Using an unbalanced panel of 34,701 executives in 1,386 public listed firms in China during 1999 and 2006, the paper finds that (1) pay increases as executives move up the corporate hierarchy into higher ranks; (2) pay gap is the largest between the first- and second-tier executives; (3) pay dispersion increases with the number of tournament participants and the risk of the business environment; (4) state ownership of shares reduces pay, pay gap and the sensitivities of the contestant pool and business risk to pay dispersion; (5) board composition and independence, CEO duality and the independence of the supervisory committee all affect pay and pay dispersion. Overall, this paper shows that listed firms in China, as they become more and more market-oriented, have adopted a pay structure that is largely consistent with the predictions of tournament theory, and that it is important to consider both state ownership and corporate governance in analyzing executive compensation structure.
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