The dynamic role of state governance in executive compensation in China

This paper investigates the dynamic link between executive compensation and corporate governance of listed Chinese firms from 2003 to 2012. Empirical evidence supports agency theory predictions of a positive relationship between firm performance and executive compensation over the period of the study. Findings also indicate a dramatic shift in the relationship between state ownership and executive compensation over time. Consistent with previous studies, we find that state ownership is not significant prior to 2005; but analysing newly available data reveals a dramatic shift in and a negative impact of state ownership on compensation from 2006 to 2012. Empirical results also suggest that state ownership may act to mitigate agency problems by reducing executive compensation, as new independent board members, CEOs and to some degree the compensation committees, provide a counter balancing upward pressure on CEO compensation in recent years. From a policy perspective, robust findings also suggest that recent policy reforms targeted at strengthening the link between pay and performance have been successful.