Gender diversity, institutional factors, and CEO compensation in China

Abstract

Executive compensation has attracted public criticism and regulatory attention in various countries around the world. While previous research shows that a more powerful CEO receives greater compensation, less is known about how governance mechanisms and institutional forces mitigate or exacerbate CEO’s abuse of power to inflate CEO pay. This article examines the impacts of gender diversity in compensation committees, government regulation, and subnational culture (Confucianism and socialist ideology) on CEO compensation in China. The analyses show that while government regulation, Confucianism, and socialist ideology can reduce CEO compensation, the effectiveness of each mechanism appears to be context-specific. Different institutional forces can deter CEO power from different sources. Institutional environment can augment or limit CEO’s abuse of power to extract greater compensation from the company. We do not find gender diversity in compensation committees to be effective in restraining CEO compensation. Our results are robust to different measures of pay excessiveness (absolute and relative terms) and after controlling for endogeneity. This research suggests that practitioners should consider both CEO characteristics and institutional environment when they design a corporate governance system.

Keywords:

• compensation
• Confucianism
• gender diversity
• government regulation
• socialism

Notes

Notes

1 Organisation for Economic Co-Operation and Development (OECD). (2004). OECD Principles of Corporate Governance 2004. Retrieved from http://www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf on 3/6/2013.

2 Company Law of the People's Republic of China. Retrieved from http://www.fdi.gov.cn/1800000121_39_4814_0_7.html on January 3, 2016.

3 Code of Corporate Governance for Listed Companies in China. Retrieved from http://www.csrc.gov.cn/ on September 24, 2015.

4 It is common for the Chinese government to reshuffle the positions of government officials and SOE senior executives for political (e.g., political promotion) or business (industry restructuring) reasons. For instance, the chairpersons or CEOs (Guohua Xi, Xiaobing Chang, and Xiaochu Wang) of the three largest telecommunication SOEs (China Mobile, China Unicom and China Telecom) and the vice-minister of the Ministry of Industry and Information Technology (Bing Shang) have recently rotated their leadership roles (Perez, 2015). CEO turnover is less frequent in POEs since many POEs are family-owned. Because we exclude firms which have CEO turnovers between years, we have more POE observations than SOE observations in our sample.

5 Business connectedness is proxied by a dummy variable and equals 1 if a CEO holds directorships in other listed firms.

6 Coastal cities include Wuhu in Anhui, Fuzhou, Quanzhou and Xiamen in Fujian, Chaozhou, Guangzhou, Shantou, Shenzhen, Shunde, Zhanjiang, and Zhuhai in Guangdong, Haikou and Sanya in Hainan, Qinhuangdao in Hebei, Nantong, Suzhou, and Xinghua in Jiangsu, Dalian, Fushun, Jinzhou and Yingkou in Liaoning, Qingdao, Weihai, Yantai, and Zibo in Shandong, Shanghai, Tianjin, Ningbo and Zhoushan in Zhejiang.

7 Compensation for top executives in China is usually in cash. Equity compensation such as stock options is not common as an approval from the CSRC is required (Firth, Leung, & Rui, 2010).

8 Data on regional worker pay by province are retrieved from China Statistical Yearbooks, which are available from National Bureau of Statistics of China’s website at www.stats.gov.cn.

9 In addition to CEO tenure, CEO duality, and CEO political connectedness, another measure of CEO power which is often used in previous studies is CEO share ownership. We include CEO ownership as our control variable rather than an explanatory variable because according to agency theory, CEO ownership can also represent the degree to which CEO’s interest is aligned with shareholder’s interests (Jensen & Meckling, 1976).

10 The living consumption index data are obtained from China Statistical Yearbooks, which are available from the website of the National Bureau of Statistics of China at www.stats.gov.cn.

Additional information

Funding

This work was supported by a research grant from School of Accounting, Curtin University.