The Political Determinants of Executive Compensation: Evidence from an Emerging Economy

• Main Authors: LIANG, Hao, RENNEBOOG, Luc, SUN, Sunny Li
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Executive compensation; Political economy; State ownership; Market friction; Asian Studies; Corporate Finance; Human Resources Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4769; https://doi.org/10.1016/j.ememar.2015.04.008
• Institution: Singapore Management University

In regulated economies, corporate governance mechanisms such as executive compensation are less driven by market-based forces but more subject to political influence. We study the political determinants of executive compensation for all listed Chinese firms in the context of an exogenous shock that removed market frictions in share-tradability. Under strong political constraints, state ownership reduced the managerial pay levels and increased pay-for-performance sensitivity (to asset-based benchmarks). Board independence and compensation committees do not curb managerial pay, and market-based factors do not have a significant influence. However, these effects reversed following the governance shock (removal of market frictions in share tradability).