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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
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    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

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