Manuscript Type:Empirical
Research Question/Issue:We investigate the effect of insider control from the managerial power perspective and the globalpay benchmarks from the behavioral approach on Chinese executive compensation.
Research Findings:Based on a balanced panel sample of 502 Chinese listed firms between 2001 and 2006, we find that bothCEO duality and CEO ownership exert significant influence on Chinese executive compensation contracting and theycontribute to the high level of executive compensation. We support the managerial power hypothesis by arguing that CEOduality and CEO shareholding tend to entrench insider managers further to collude with government officials and extracta firm’s assets. Shareholdings appear to actively restrain managers from serving their self-interests as to their pay levels,including on the board independence and the supervisory board levels. However, private institutional shareholdingsperform actively in restraining managerial influence on the executive pay setting. There is an upward increase in theexecutive pay levels due to the global pay benchmark effects introduced by foreign investment. The compensation com-mittees’ decisions on executive pay levels are largely influenced by the global peer group’s pay levels, rather than linkingto firm performance as predicted by the optimal contracting model.
Theoretical Implications:We extend the optimal contracting model by incorporating the managerial power hypothesis todemonstrate how insider control affects the Chinese executive pay setting. We also add a behavioral approach to reflect howthe global pay benchmarks affect the Chinese executive compensation setting via the negotiation between a firm’s com-pensation committee and its managers.
Practitioner/Policy Implications:The Chinese government should consider exerting rigorous restrictions on executiveshareholding and management buy-out as an incentive for managers. In addition, the Chinese Code of Corporate Gover-nance should explicitly restrict CEO duality. The government should be aware of the potential influence of behavioral biasin human decisions departing from rational economical criteria, and set policies to balance the benefits of introduction offoreign investment against the costs of resultant excessive executive compensation, and the benefits of setting a compen-sation committee as a corporate governance control device against the costs of the compensation committees working withthe executives together to increase the executive pay level.