The efficiency of compensation contracting in China: Do better CEOs get better paid?

Jack K. H. Fung and David Pecha ()
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Jack K. H. Fung: The Hong Kong Polytechnic University
David Pecha: University of Southern Denmark

Review of Quantitative Finance and Accounting, 2019, vol. 53, issue 3, No 5, 749-772

Abstract: Abstract Over recent years, China adopted a number of ‘western-style’ reforms of corporate governance and executive compensation. We investigate whether boards of Chinese firms evaluate CEO ability and remunerate their CEOs accordingly, an essential tenet of efficient compensation contracting. Using Data Envelopment Analysis to measure CEO ability, we do not find any evidence that CEO ability matters in compensation contracting decisions—it does not lead to either higher pay, stronger pay-for-performance sensitivity, or a higher likelihood of equity grants. This is surprising, since we find evidence that higher ability CEOs achieve superior firm performance. In contrast, we find that powerful CEOs do not overperform, while they enjoy large abnormal pay. Overall, our results suggest that Chinese firms fail to embrace new corporate governance reforms and are unable to fully utilize the reforms’ benefits.

Keywords: Corporate governance; CEO ability; CEO compensation; China; Efficient contracting (search for similar items in EconPapers)
JEL-codes: G3 G34 G38 J33 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-018-0765-y

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