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Negotiating or regulating executive compensation: application of Benford’s law

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  • Yu-Hsiang Yang
  • Yao-Min Chiang
  • Hai-Ming Liu
  • Li Huang

Abstract

In this study, Benford’s law is used to examine whether the negotiation ability of executives can strongly influence the compensation level. In this paper, we analyse the executive compensation data of more than 3,000 Chinese listed companies from 1999 to 2017. The results indicated that Benford’s law can be used to distinguish performance-based compensations from basic salaries of executives. Some executives prefer to be paid in the form of integers. This study finds that violation of Benford’s law in private enterprises indicate that these executives have negotiating power or strong preferences. However, violation of Benford’s law in state-owned enterprises is due to restriction orders by the government to control the compensation of top executives. This result reveals the limitation of Benford’s law on manipulated numbers.

Suggested Citation

  • Yu-Hsiang Yang & Yao-Min Chiang & Hai-Ming Liu & Li Huang, 2022. "Negotiating or regulating executive compensation: application of Benford’s law," Applied Economics Letters, Taylor & Francis Journals, vol. 29(9), pages 785-789, May.
    • Handle: RePEc:taf:apeclt:v:29:y:2022:i:9:p:785-789
    DOI: 10.1080/13504851.2021.1885607
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