Abstract
Abstract Since 2002, the China Securities Regulatory Commission (CSRC) has required companies listed in China to set up compensation committees. In response to this requirement, this paper examines the relationship between CEO compensation and the establishment and independence of such committees. Our results show that the existence of compensation committees (and their greater independence) can improve both the level of pay and the pay-performance sensitivity of CEO compensation in SOEs, supporting the optimal contracting argument. In contrast, when managerial power is stronger than that of the compensation committee, pay increases but not the pay-performance sensitivity, with the committee’s independence having no significant impact on compensation contracts. These findings are in line with the managerial power argument. Our results indicate that the CSRC’s requirement that listed companies form independent compensation committees is effective under certain conditions.
Highlights
During the period from 2001 to 2002, the China Securities Regulatory Commission (CSRC) promulgated the Guiding Opinions on Establishment of Independent Director Systems by Listed Companies and the Code of Corporate Governance for Listed Companies in China
To further distinguish how well the optimal contracting theory and management power theory describe the effects of the compensation committee system on listed companies in China, we perform subsample tests by separating the companies according to their ownership attributes and management power
We have analysed the effects of compensation committees on the CEO compensation of listed companies in China
Summary
During the period from 2001 to 2002, the China Securities Regulatory Commission (CSRC) promulgated the Guiding Opinions on Establishment of Independent Director Systems by Listed Companies and the Code of Corporate Governance for Listed Companies in China. These require listed companies to establish an independent director system and professional committees covering compensation, nomination, strategic decision making, and auditing. In the absence of mandatory regulations imposing a time limit for establishing an independent director system and compensation committee, a small minority of listed companies have not yet implemented these requirements, they have fulfilled their disclosure obligations. It is clear that while the majority of listed companies in China have established professional committee systems over the last decade, to some extent this has been the result of exogenous mandatory requirements
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