Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges

46 Pages Posted: 24 Oct 2005

See all articles by Takao Kato

Takao Kato

Colgate University - Economics Department; IZA Institute of Labor Economics

Cheryl Long

Colgate University - Economics Department

Date Written: September 2005

Abstract

This paper provides evidence on how executive compensation relates to firm performance in listed firms in China. Using comprehensive financial and accounting data on China's listed firms from 1998 to 2002, augmented by unique data on executive compensation, ownership structure and board characteristics, we find for the first time statistically significant sensitivities and elasticities of annual cash compensation (salary and bonus) for top executives with respect to shareholder value in China. In addition, sales growth is shown to be significantly linked to executive compensation and that Chinese executives are penalized for making negative profit although they are neither penalized for declining profit nor rewarded for rising profit insofar as it is positive. Perhaps more importantly, we find that ownership structure of China's listed firms has important effects on pay-performance link in these firms: (i) state ownership of China's listed firms is weakening pay-performance link for top managers and thus possibly making China's listed firms less effective in solving the agency problem; (ii) such effects exist for both direct government ownership through state shares and indirect government ownership through legal person shares and indirect ownership of listed firms by the state may weaken pay-performance link more than direct state ownership; and (iii) corporate governance reform measures such as the promotion of independent directorship and the separation of the CEO position from the board chairmanship are ineffective in making pay-performance link stronger. As such, ownership restructuring may be needed for China to successfully transform its SOEs to efficient modernized corporations and reform its overall economy.

Keywords: executive compensation, firm performance, corporate governance, ownership structure, China, and transition economies

JEL Classification: P31, P34, O16, G30, O53, M12, M52, G15, J33

Suggested Citation

Kato, Takao and Long, Cheryl Xiaoning, Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges (September 2005). IZA Discussion Paper No. 1767, William Davidson Institute Working Paper No. 690, Available at SSRN: https://ssrn.com/abstract=555794 or http://dx.doi.org/10.2139/ssrn.555794

Takao Kato (Contact Author)

Colgate University - Economics Department ( email )

13 Oak Drive
Hamilton, NY 13346
United States
315-228-7562 (Phone)
315-228-7033 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Cheryl Xiaoning Long

Colgate University - Economics Department ( email )

13 Oak Drive
Hamilton, NY 13346
United States

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