Executive compensation limit and enterprise performance: Evidence from natural experiment of pay ceiling order

Based on the natural experiment of the "central management enterprise salary system reform" (pay ceiling order), which was implemented on January 1, 2015, this paper empirically examines the impact of policy on the performance of listed state-owned enterprises. By using the difference-in-differences (DID) model and propensity score matching (PSM) method, we find that "pay ceiling order" has a negative effect on the operating performance of listed companies. Further studies on the dynamic effect of "pay ceiling order" show that the second year is more significant than the first year after implementation. It is also found that the policy has the heterogeneity influence on the performance of different types of enterprises. Results show that performance of central government-owned, high compensation and large-scale enterprises declined more comparing to the local government-owned, low pay and small-scale enterprises. Our findings suggest that executive compensation system of state-owned enterprises should follow the enterprise features and market-oriented reform should be accelerated to maximize the enterprise value. © 2019, Editorial Board of Journal of Systems Engineering Society of China. All right reserved.