Chinese executive compensation: the role of asymmetric performance benchmarks

Abstract

We study asymmetric performance benchmarking in Chinese executive compensation contracts between 2000 and 2010. We predict that while relative performance evaluation criteria are important in executive pay contracts, managerial power and influence will result in a decoupling between pay and performance. We predict that Chinese managers are rewarded for superior performance but not penalized for inferior performance. We test this asymmetric pay-for-performance hypothesis using three performance benchmarks: whether firm performance is positive/negative, above/below industry average, and above/below regional average. We find the sensitivity between executive compensation and firm accounting performance is asymmetric. It is significantly stronger when firm accounting performance is positive or firm performance exceeds industry or regional median benchmarks compared to cases when firm accounting performance is negative or is below industry or regional median benchmarks. We find little evidence that ownership structure and internal governance mechanisms moderate the asymmetric pay-for-performance relationship.

Keywords:

• executive compensation
• corporate governance
• benchmarking
• pay for performance
• China

Notes

1. It should be noted that grants of stock options and other equity incentives were not allowed before 2006 and can thus be ignored for the construction of the executive compensation measure in the early stage of our sample period, pre-2006. Although stock options and other equity incentives are allowed in China since 2006, Conyon and He (2012b) reported that the usage of stock options is still very rare. Thus, the exclusion of such information would not significantly distort our total compensation measure.

2. CSRC classifies industries into 22 categories: 1: Agriculture and Fishery; 2: Mining; 30: Manufacturing – Food/Beverage; 31: Manufacturing – Textiles; 32: Manufacturing – Furniture; 33: Manufacturing – Paper/Printing; 34: Manufacturing – Petroleum; 35: Manufacturing – Electronic; 36: Manufacturing – Metal/Non-metal; 37: Manufacturing – Machines; 38: Manufacturing – Pharmaceutical; 39: Manufacturing: Others; 4: Electricity, Water and Other Energy Manufacturing and Supply; 5: Construction; 6: Transportation and Logistics; 7: Information Technology; 8: Wholesales and Retails; 9: Finance and Insurance; 10: Real Estate; 11: Service; 12: Communication; 13: Others. Chinese listed firms sometimes report different industry classifications in different years. When this occurs, the most recent year industry code is applied.

3. The four direct-controlled municipalities are Beijing, Shanghai, Tianjin, and Chongqing. The 27 mainland provinces (excluding Taiwan, HongKong, and Macau) include Anhui, Fujian, Gansu, Guangdong, Guangxi, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Neimeng (Inner Mongolia), Ningxia, Qinghai, Sangxi, Shandong, Shanxi, Sichuan, Xizang (Tibet), Xinjiang, Yunnan, Zhejiang.

4. This broad estimating equation is consistent with the extant executive compensation determination literature, and we have endeavored to include relevant standard controls. One area for future research, though, is CEO wage dynamics as studied by Conyon and He (2012b). They find that CEO pay is persistent in China. The implications of this might warrant future research for asymmetric benchmarking considered here.

5. The title ‘Chief Executive Officer’ or ‘CEO’ is not commonly used in the GTA dataset. In this study, we identify the CEO position by the title ‘General Manager’ or ‘President’. This captures most CEOs. We also manually checked other titles such as ‘Administrative President’ and ‘Executive President’ in cases where current CEO compensation data was missing.