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The efficiency of compensation contracting in China: Do better CEOs get better paid?

Author

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  • Jack K. H. Fung

    (The Hong Kong Polytechnic University)

  • David Pecha

    (University of Southern Denmark)

Abstract

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.

Suggested Citation

  • Jack K. H. Fung & David Pecha, 2019. "The efficiency of compensation contracting in China: Do better CEOs get better paid?," Review of Quantitative Finance and Accounting, Springer, vol. 53(3), pages 749-772, October.
    • Handle: RePEc:kap:rqfnac:v:53:y:2019:i:3:d:10.1007_s11156-018-0765-y
    DOI: 10.1007/s11156-018-0765-y
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Corporate governance; CEO ability; CEO compensation; China; Efficient contracting;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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