Corporate performance and CEO compensation in China

This paper examines the compensation of CEOs in China's listed firms. First, we discuss what is known about the setting of CEO compensation and then we go on to examine factors that may help explain variations in the use of performance related pay. In China, listed firrns have a dominant or controlling shareholder and we argue that the distinct types of controlling shareholder have different impacts on the use of incentive pay. We find that firms that have a State agency as the major shareholder do not appear to use performance related pay. In contrast, firms that have private blockholders or SOEs as their major shareholders relate the CEO's pay to. increases in stockholders' wealth or increases in profitability. However the pay-performance sensitivities for CEOs are low and this raises questions about the effectiveness of firms' incentive systems. (c) 2005 Elsevier B.V. All rights reserved.