IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v65y2019i7p2947-2965.html
   My bibliography  Save this article

Political Promotion, CEO Incentives, and the Relationship Between Pay and Performance

Author

Listed:
  • Xiaping Cao

    (Lingnan College, Sun Yat-sen University, 510000 Guangzhou, China)

  • Michael Lemmon

    (BlackRock, San Francisco, California 94102)

  • Xiaofei Pan

    (University of Wollongong, Wollongong NSW 2500, Australia)

  • Meijun Qian

    (Research School of Finance, Actuarial Studies and Statistics, Australian National University, Canberra ACT 2601, Australia)

  • Gary Tian

    (Macquarie University, North Ryde NSW 2019, Australia)

Abstract

Both theory and empirical evidence suggest that managers’ career concerns can serve as an important source of implicit economic incentives. We examine how incentives for political promotion are related to compensation policy and firm performance in Chinese state-owned enterprises. We find that the likelihood that the CEO receives a political promotion is positively related to firm performance. We also find that CEOs with a higher likelihood of political promotion have lower pay levels and lower pay–performance sensitivity. Overall, the evidence suggests that competition in the political job market helps mitigate weak monetary incentives for CEOs in China.

Suggested Citation

  • Xiaping Cao & Michael Lemmon & Xiaofei Pan & Meijun Qian & Gary Tian, 2019. "Political Promotion, CEO Incentives, and the Relationship Between Pay and Performance," Management Science, INFORMS, vol. 65(7), pages 2947-2965, July.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:7:p:2947-2965
    DOI: 10.1287/mnsc.2017.2966
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2017.2966
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2017.2966?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Bergstresser, Daniel & Philippon, Thomas, 2006. "CEO incentives and earnings management," Journal of Financial Economics, Elsevier, vol. 80(3), pages 511-529, June.
    3. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
    4. Chang, Eric C. & Wong, Sonia M.L., 2009. "Governance with multiple objectives: Evidence from top executive turnover in China," Journal of Corporate Finance, Elsevier, vol. 15(2), pages 230-244, April.
    5. Mark R. Huson & Robert Parrino & Laura T. Starks, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long‐Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
    6. Taye Mengistae & Lixin Colin Xu, 2004. "Agency Theory and Executive Compensation: The Case of Chinese State-Owned Enterprises," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 615-638, July.
    7. Weiye Li & Louis Putterman, 2008. "Reforming China's SOEs: An Overview," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(3), pages 353-380, September.
    8. Brickley, James A. & Linck, James S. & Coles, Jeffrey L., 1999. "What happens to CEOs after they retire? New evidence on career concerns, horizon problems, and CEO incentives," Journal of Financial Economics, Elsevier, vol. 52(3), pages 341-377, June.
    9. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    10. Newey, Whitney K, 1990. "Semiparametric Efficiency Bounds," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(2), pages 99-135, April-Jun.
    11. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    12. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    13. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    14. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-b.
    15. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    16. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-a.
    17. Firth, Michael & Fung, Peter M.Y. & Rui, Oliver M., 2007. "How ownership and corporate governance influence chief executive pay in China's listed firms," Journal of Business Research, Elsevier, vol. 60(7), pages 776-785, July.
    18. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    19. Gul, Ferdinand A. & Cheng, Louis T.W. & Leung, T.Y., 2011. "Perks and the informativeness of stock prices in the Chinese market," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1410-1429.
    20. David D. Li, 1998. "Changing Incentives of the Chinese Bureaucracy," William Davidson Institute Working Papers Series 130, William Davidson Institute at the University of Michigan.
    21. Li, David D, 1998. "Changing Incentives of the Chinese Bureaucracy," American Economic Review, American Economic Association, vol. 88(2), pages 393-397, May.
    22. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    23. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    24. Qian, Yingyi & Xu, Chenggang, 1993. "The M-form hierarchy and China's economic reform," European Economic Review, Elsevier, vol. 37(2-3), pages 541-548, April.
    25. Groves, Theodore & Yongmiao Hong & John McMillan & Barry Naughton, 1995. "China's Evolving Managerial Labor Market," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 873-892, August.
    26. Jeffrey L Coles & Zhichuan (Frank) Li & Albert Y Wang, 2018. "Industry Tournament Incentives," Review of Financial Studies, Society for Financial Studies, vol. 31(4), pages 1418-1459.
    27. Burns, Natasha & Minnick, Kristina & Starks, Laura, 2017. "CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences, and Consequences," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 519-551, April.
    28. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
    29. Kini, Omesh & Williams, Ryan, 2012. "Tournament incentives, firm risk, and corporate policies," Journal of Financial Economics, Elsevier, vol. 103(2), pages 350-376.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lou, Xu & Qian, Aimin & Zhang, Chenyu, 2021. "Do CEO's political promotion incentives influence the value of cash holdings: Evidence from state-owned enterprises in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    2. Jenter, Dirk & Cziraki, Peter, 2021. "The Market for CEOs," CEPR Discussion Papers 16281, C.E.P.R. Discussion Papers.
    3. Ferreira, Daniel & Athanasakou, Vasiliki & Goh, Lisa, 2017. "Changes in CEO Stock Option Grants: A Look at the Numbers," CEPR Discussion Papers 12318, C.E.P.R. Discussion Papers.
    4. Shujun Ding & Chunxin Jia & Craig Wilson & Zhenyu Wu, 2015. "Political connections and agency conflicts: the roles of owner and manager political influence on executive compensation," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 407-434, August.
    5. Focke, Florens & Maug, Ernst & Niessen-Ruenzi, Alexandra, 2017. "The impact of firm prestige on executive compensation," Journal of Financial Economics, Elsevier, vol. 123(2), pages 313-336.
    6. Hu, Fang & Pan, Xiaofei & Tian, Gary, 2013. "Does CEO pay dispersion matter in an emerging market? Evidence from China's listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 235-255.
    7. Bradshaw, Mark & Liao, Guanmin & Ma, Mark (Shuai), 2019. "Agency costs and tax planning when the government is a major Shareholder," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 255-277.
    8. Renneboog, L.D.R. & Trojanowski, G., 2002. "The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK," Discussion Paper 2002-68, Tilburg University, Center for Economic Research.
    9. Nohel, Tom & Todd, Steven, 2005. "Compensation for managers with career concerns: the role of stock options in optimal contracts," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 229-251, March.
    10. Jack K. H. Fung & David Pecha, 2019. "The efficiency of compensation contracting in China: Do better CEOs get better paid?," Review of Quantitative Finance and Accounting, Springer, vol. 53(3), pages 749-772, October.
    11. Gan, Huiqi & Park, Myung Seok, 2016. "Are more able CEOs getting more compensated? Evidence from the pay-for-performance sensitivity of equity-based incentives," Advances in accounting, Elsevier, vol. 34(C), pages 64-76.
    12. Zhao, Hong, 2018. "Executive labor market segmentation: How local market density affects incentives and performance," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 1-21.
    13. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    14. Jian Wang & Yanhuang Huang & Hongrui Feng & Xingjian Li & Shu Yan, 2023. "CEO incentive compensation and stock price momentum," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 975-1028, April.
    15. Xie, Jun, 2015. "CEO career concerns and investment efficiency: Evidence from China," Emerging Markets Review, Elsevier, vol. 24(C), pages 149-159.
    16. Peter Cziraki & Moqi Xu, 2014. "Ceo Job Security And Risk-Taking," FMG Discussion Papers dp729, Financial Markets Group.
    17. Ali, Ashiq & Zhang, Weining, 2015. "CEO tenure and earnings management," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 60-79.
    18. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, December.
    19. Cheng, Louis T.W. & Leung, T.Y., 2016. "Government protection, political connection and management turnover in China," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 160-176.
    20. Martin J. Conyon & Lerong He, 2016. "Executive Compensation and Corporate Fraud in China," Journal of Business Ethics, Springer, vol. 134(4), pages 669-691, April.

    More about this item

    Keywords

    managerial incentives; political promotion; performance; CEO compensation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:65:y:2019:i:7:p:2947-2965. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.