Government controlling ownership and CEO compensation incentives: evidence from China

ABSTRACT

This paper investigates the relationship between government-controlling ownership and CEO compensation incentives in China, using a comprehensive evaluation of CEO pay-performance sensitivity (PPS). We find that government-controlling ownership weakens CEO PPS, with PPS being around 6 lower for CEOs in state-owned enterprises (SOEs) than CEOs in non-state-owned enterprises (non-SOEs), representing a reduction of around 14% for a CEO with the average level of PPS. The results sustain after using privatization as the experiment setting wherein firms’ ultimate controllers changed from government owners to private owners. Moreover, the negative influence of government controlling ownership on CEO compensation incentives is more prominent in SOEs with a higher level of government ownership or a lower hierarchy government as the controller. We also explore the association between CEO incentives and firm performance and find that PPS in SOEs is more important in association with firms’ stock performance than non-SOEs. Results in this paper extend studies on the influence of government controlling ownership on CEO compensation incentives, an issue that is caught much attention in the ongoing reform of China’s SOEs.

KEYWORDS:

• Ceo compensation incentives
• government-controlling ownership
• privatization
• political connection

JEL CLASSIFICATION:

• G34 G38 O38

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ To minimize the number of dropped observations and avoid sample selection bias, we deal with missing values for cash compensation in the following way: if the database or firm annual report indicates explicitly that the CEO do not receive cash compensation in the current year, we set cash compensation to zero.If the database or annual report does not indicate explicitly whether the CEO receive compensation in that year. In that case, CEO cash compensation is set to either the average cash compensation of the firm’s top three executives in that year, or set to missing value if the latter information is not available.

² The calculation is as follows: (−1.632/15.422)*100%=-10.582% and (−6.138/45.013)*100%=-13.636%.

³ The calculation is as follows: (1.509/13.864)*100% = 10.884% and (7.729/15.160)*100% = 50.983%.

Additional information

Funding

The work was supported by the China Scholarship Council [201906980031]; National Natural Science Foundation of China [71202174]