Abstract
To shed light on whether and how firms changed compensation practices in response to a shift in the environment in which they operated, we examine whether there is contagion effect of executive compensation regulation on state-owned enterprises (SOEs) in the emerging market of China. Specifically, we investigate whether firms not directly affected by the changing regulatory environment nonetheless changed executive compensation in response to the actions of the directly affected firms, which is called contagion effect. We further examine the specific contagion mechanisms and the economic consequences of regulation on compensation. We find that the regulation has a significant effect on compensation gap in central SOEs and a contagion effect on local SOEs but not for non-SOEs. Within SOEs, there is an intra-industry contagion effect of compensation regulation but not an intra-region effect. Further, central SOEs and local SOEs experience reduced firm performance after the compensation regulations, but not the non-SOEs; indicating that the compensation regulation does not have favorable economic consequences for both the directly affected central SOEs and the indirectly affected local SOEs.
Highlights
The global financial crisis of 2008 triggered a trend in governmental pay regulation world-wide, which led to an increasing role of government regulations in corporate governance and regulations on executive compensations in particular (e.g., Gouldman and Victoravich, 2020)
We investigate whether state-owned enterprises (SOEs)1 owned by the local governments in China have mimicked their peers and changed their executive compensation packages subsequent to the pay regulations on SOEs owned by the central-government
The results show that the coefficient on Reg is positive and significant (β = 0.28, t = 3.29, p < 0.01) when GAPD is used as a proxy for compensation gap while it is negative and significant (β = –0.39, t = –3.65, p < 0.01) when GAPR is used, indicating that the compensation regulation did reduce the ratio of executive pay to the average employee but not the dollar amount difference between executives and average employees, which indicating the regulation has negative association on the pay gap measured by GAPR
Summary
The global financial crisis of 2008 triggered a trend in governmental pay regulation world-wide, which led to an increasing role of government regulations in corporate governance and regulations on executive compensations in particular (e.g., Gouldman and Victoravich, 2020). In February 2009, the Ministry of Finance issued The Measures on Executive Compensation of State-Owned and State Holding Enterprises to regulate the executive pay of central SOEs in the financial and insurance industry It stipulates that the maximum basic salary of CEOs of financial firms should not be more than five times the average of employees on fixed salaries. The most prevailing and significant reform incurred in February 2013, when the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Human Resources and Social Security issued Several Opinions on Further Reform of Income Distribution System to strengthen the regulation on executive compensation and to enforce regulatory policies on compensation and narrow the compensation gap of SOEs owned by the central government It mandates that the growth rate of executive salary should be lower than that of the average employees’ salary.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
