The Wages of Austerity: Executive Pay Caps and the Quiet Life

We study how binding executive pay compression affects managerial behavior and firm outcomes. Using China's 2015 executive pay-cap reform for state-owned enterprises, we compare SOEs with non-SOEs around a policy that sharply reduced executive compensation and limited common substitution channels. Treated firms exhibit lower work effort and CEO engagement, fewer unrelated acquisitions, less risk-related language in disclosure, lower investment, weaker investment efficiency, higher cash holdings, slower cash adjustment, and lower Tobin's Q and total factor productivity. We find little evidence that executives respond by increasing observable perks or tunneling. Instead, the results are more consistent with a passive “quiet life” response, in which weaker monetary incentives reduce managerial initiative and responsiveness. The effects are stronger for older CEOs and in more competitive industries, where performance incentives are likely more salient. CEO turnover rises, especially among high-performing executives, and pay-performance sensitivity declines, suggesting that selection effects and weaker formal incentives reinforce the behavioral response. Treated firms also increase ESG and CSR scores and employment, consistent with greater attention to politically salient outcomes. Overall, the evidence suggests that binding pay compression can generate real efficiency costs even when alternative career, reputational, and political incentives remain in place.