Political Promotion, Ceo Compensation, and Their Effect on Firm Performance

• Main Authors: CAO, Xiaping Jerry, LEMMON, MICHAEL, TIAN, GARY, PAN, XIAOFEI
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2009
• Subjects: Managerial incentives; political promotion; firm performance; CEO compensation; Human Resources Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1816; https://ink.library.smu.edu.sg/context/lkcsb_research/article/2815/viewcontent/JerryCaoCEOCompensationandPoliticalCareer.pdf
• Institution: Singapore Management University

We investigate the impact of CEO’s compensation-based and promotion-based incentives on firm performance in China, where the CEOs of most state-owned enterprises are government appointed and thus face dual incentives. We find that both monetary and political incentives are positively related to firm performance. More important, we pinpoint a substitution effect: the monetary compensation-based incentive is weaker when CEO incentives are heavily driven by political career concerns. Overall, the evidence suggests that, via a competitive arena in the external political job market, promotion helps mitigate weak incentives for CEOs in China. State control or political connection is not necessarily inconsistent with good economic incentives.