The efficiency of compensation contracting in China: Do better CEOs get better paid?
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Over recent years, China adopted a number of ‘western-style’ reforms of corporate governance and executive compensation. We investigate whether boards of Chinese firms evaluate CEO ability and remunerate their CEOs accordingly, an essential tenet of efficient compensation contracting. Using Data Envelopment Analysis to measure CEO ability, we do not find any evidence that CEO ability matters in compensation contracting decisions—it does not lead to either higher pay, stronger pay-for-performance sensitivity, or a higher likelihood of equity grants. This is surprising, since we find evidence that higher ability CEOs achieve superior firm performance. In contrast, we find that powerful CEOs do not overperform, while they enjoy large abnormal pay. Overall, our results suggest that Chinese firms fail to embrace new corporate governance reforms and are unable to fully utilize the reforms’ benefits.
KeywordsCorporate governance CEO ability CEO compensation China Efficient contracting
JEL ClassificationG3 G34 G38 J33
We are grateful to the anonymous reviewers and the editor for their detailed comments and suggestions. We are also grateful to Agnes Cheng, Ji-Chai Lin, Grace Pownall, Joshua Ronen, Franco Wong, Woo-Jong Lee, Wenjing Ouyang (discussant), and Hong Fan (discussant) and we would also like to thank the participants of the 24th Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management (June 2016—Hsinchu, Taiwan), The Third International Conference of the Journal of International Accounting Research (July 2015—São Paulo, Brazil), and the Joint China Accounting and Finance Review and Journal of Accounting, Auditing and Finance Conference (May 2015—Chengdu, China).
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Conflict of interest
The authors declare that they have no conflict of interest.
Statement of human rights
For this type of study formal consent is not required.
Statement on the welfare of animals
This article does not contain any studies with human participants or animals performed by any of the authors.
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