Abstract

We study Chinese executive compensation by fully addressing the impact of reference point on executive compensation design from behavioural approach. We find the Chinese executive pay setting is heavily influenced externally by the pay level of their peer groups, internally by the other executives within firms and by their own pay level in the previous period. We also find that the integrated effect of the three reference points on executive pay settings is stronger than for each individual reference point. Therefore, our study provides empirical evidence from the perspective of emerging markets to support the application of reference point theory on executive pay setting. We demonstrate that the behavioural-orientated approach provides a more robust explanation on the determinants of executive compensation in addition to the performance-link.

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