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Executive Compensation, Firm Performance, and State Ownership in China: Evidence from New Panel Data

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Author Info
Takao Kato ()
Cheryl Long ()

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Abstract

This paper provides the first systematic evidence on compensation for executives of firms listed in China’s emerging stock market (currently the eighth largest of the world with market capitalization of over $550 billion). Specifically, using comprehensive financial and accounting data on China’s listed firms from 1998 to 2002 (data modeled after Compustat and CRSP in the U.S.), augmented by unique data on executive compensation, 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. The size of the estimated sensitivities imply that a 1000 RMB increase in shareholder value yields a 0.020 RMB to 0.053 RMB increase in annual cash compensation, whereas the size of the estimated elasticities suggest that a 10 percent increase in shareholder value results in 3.7 to 4.0 percent increase in annual cash compensation for top executives. The estimated sensitivities and elasticities of cash compensation for top executives in China’s listed firms are greater than what has been reported for Japan and the U.S. However, we also find that state ownership of China’s listed firms is weakening executive pay-performance link and thus possibly making China’s listed firms less effective in solving the agency problem. As such, ownership restructuring may be needed for the “shareholding experiment” to fully succeed in transforming China’s emerging listed firms to efficient modernized corporations and for the overall successful economic transition of China. Finally, we find that sales growth is 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.

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 2004-690.

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Length: 39 pages
Date of creation: 01 May 2004
Date of revision:
Handle: RePEc:wdi:papers:2004-690

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Related research
Keywords: transition economies; China; executive compensation; firm performance; corporate governance; and ownership structure.;

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Find related papers by JEL classification:
P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Takao Kato & Cheryl Long, 2005. "Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges," IZA Discussion Papers 1767, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Takao Kato & Woochan Kim & Ju Ho Lee, 2005. "Executive Compensation, Firm Performance, and Chaebols in Korea: Evidence from New Panel Data," IZA Discussion Papers 1783, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Takao Kato & Cheryl Long, 2006. "CEO Turnover, Firm Performance and Enterprise Reform in China: Evidence from New Micro Data," IZA Discussion Papers 1914, Institute for the Study of Labor (IZA). [Downloadable!]
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