Performance Measurement and Incentive Compensation: An Empirical Analysis and Comparison of Chinese and Western Firms' Practices

Abstract

This paper describes the findings of a study aimed at providing a replication and extension in China of studies focused on incentive compensation practices of automobile retailers in the USA and the Netherlands. Rich, detailed data-sets from all three countries are analysed together and in comparison. As theory is not well developed at the level of detail of the data collected, the purpose of this study was primarily exploratory, to provide empirics that can lead to the development of theory. The findings show that Chinese firms are much more likely to provide incentive compensation than are Dutch firms, and they are even somewhat more likely to provide them than are US firms. But Chinese bonus plans are more likely to be subjective, rather than formula-based. In the situations where incentive payments are based on pre-set formulas, the Chinese firms' systems are more like those used in the Netherlands than in the USA, with bonuses based on non-financial performance measures and with more complex performance–reward functions. Like managers in the US firms, but unlike managers in the Dutch firms, Chinese managers who receive some form of incentive compensation are more satisfied with their pay. The paper concludes with tentative explanations of the findings and suggestions for future research.

Acknowledgements

This paper has benefited from comments by the Editors (Mahmoud Ezzamel and Jason Xiao) and two reviewers, as well as from Shannon Anderson, Margaret Christ, David Erkens, Matt Hall, Christo Karuna, Tatiana Sandino and workshop participants at the American Accounting Association Annual Meeting, China Accounting and Finance Review Symposium, Manchester Business School, Taiwan Chang-Gung University, Taiwan Chung-Cheng University, Taiwan National Chung-Hsing University, Turku School of Economics, University of Auckland and Vienna University of Economics and Business. The authors also appreciate the helpful research assistance from Fei Du, Yiming Hu, Zhiyuan Liu, Melissa Martin and Pingxin Wang.

Notes

Rich descriptive details of the incentive contracts in the USA and the Netherlands can be gleaned from the published articles (Gibbs et al., 2004, 2009; Jansen et al., 2009). The tables in the later sections of this paper also present some of the key features of these incentive contracts along with comparisons and contrasts with the newly collected data from China.

The results with and without the feature of robust standard errors are qualitatively similar. However, another way in which the assumption of independence may be violated is through the influence of the manufacturers on dealership practices. Further examination of this possibility revealed that many dealerships sell multiple brands. Specifically, 40/41/26% of the Chinese/US/Dutch dealerships sell more than one brand, which likely mitigates the concern that any one manufacturer's influence on a given dealership might cause a threat to the independence of observations. Moreover, focusing on the Chinese sample, the following brands were represented: Cherry, Toyota, Jinbei, Santana, Jetta, Fukang, Audi, Xiali and ‘other’. Taking Audi as a ‘luxury’ brand among these (Audi coded as 1, zero otherwise), we find that ‘luxury brand’ correlates positively and significantly with Dealership Customer Service Orientation (r = 0.24, p < 0.01) and Dealership Differentiation Strategy (r = 0.44, p < 0.01), which is encouraging in terms of data validity. Moreover, correlations of this magnitude in the expected direction provide reasonable comfort that any possible variation in the results due to manufacturer (brand) influence is captured to some extent by two variables included in the analyses (customer service and dealership strategy). Given that the results that include these two variables are qualitatively similar with and without the feature of robust standard errors, there is no reason to believe that our results are unduly affected by the threat of lack of independence of observations across multiple respondents within dealerships as well as across multiple dealerships due to manufacturers' influence.

We were unable to obtain measures of profit or other financial outcomes from the Chinese firms.