CEO “anomaly” compensation incentives and financial investment: Evidence from the SOEs of China

The theory of compensation incentive suggests that matching management positions with appropriate compensation is conducive to improving the efficiency of corporate production and operations. However, within the backdrop of China's institutional framework, the pay restriction policy for executives of state-owned enterprises (SOEs) has led to a phenomenon known as pay-position upside down, which goes against the compensation incentive theory. This paper explores how this phenomenon affects financial investment from the standpoint of the profit-seeking incentive of pursuing political promotions and the rational economic man's motivation to flee accountability for performance evaluations. Our difference-in-differences estimations show that the CEO pay-position upside down has a positive effect on financial investment. Mechanistic analyses show that this link is strengthened by SOEs undergoing mixed reform, SOEs in the provinces inspected by the Central Inspection Team, and SOEs in situations where CEOs are younger and hold shorter tenures. Additionally, the central SOEs' inclination to pursue political promotions and handle performance reviews results in increased investment in financial assets. The findings of this study offer a new perspective on how to use compensation contracts for management incentives effectively and provide valuable insights into the rational arrangement of compensation and positions within state-owned enterprises.