Managerial power versus optimal contracting : which better explains executive pay in Chinese non-state-owned enterprises?

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Managerial power versus optimal contracting : which better explains executive pay in Chinese non-state-owned enterprises?

 

Author: Fung, Kwan Hung Jack
Title: Managerial power versus optimal contracting : which better explains executive pay in Chinese non-state-owned enterprises?
Degree: D.B.A.
Year: 2016
Subject: Executives -- Salaries, etc. -- China.
Corporate governance -- China.
Hong Kong Polytechnic University -- Dissertations
Department: Faculty of Business
Pages: 90 pages
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2929079
URI: http://theses.lib.polyu.edu.hk/handle/200/8766
Abstract: Executive pay can be determined in two manners. Ideally, boards devise optimal pay schemes contingent on the performance and skill of executives to incentivize executives and align their interests with those of shareholders (optimal contracting approach). However, powerful executives can personally influence boards to extract excessive compensation through suboptimal pay contracts (managerial power approach). In developed economies such as that of the United States, considerable attention has been paid to ensuring that executive pay is focused on generating wealth for shareholders rather than being abused by executives. Similarly, the Chinese government has enforced reforms regarding executive pay; for example, it explicitly requires firms to implement pay-for-performance schemes where a portion of top management pay hinges on a performance metric, most commonly return on assets (ROA). To assess whether executive pay is in line with the managerial power or optimal contracting approach after the implementation of such reforms, I test the relationship between CEO pay and proxies for CEO power (managerial power) and for CEO performance and skill (optimal contracting) among Chinese non-state-owned enterprises (non-SOEs). I exclude SOEs from my analysis because executive pay in those firms is heavily regulated, and executives tend to be driven by political goals rather than by shareholders' interests. I find that executive compensation is strongly consistent with the managerial power approach for non-SOEs. I also find some evidence consistent with optimal contracting, specifically that ROA is a determinant of executive pay, as required by the government's ruling. However, I find no evidence that managerial skill or other performance metrics influence contracting with top executives. In an additional analysis, I test whether the major "International Financial Reporting Standards-like" ("IFRS-like") accounting standards reform in 2007, with its promise of increased reliability, accuracy, and availability of accounting information to both boards and investors, led to an improvement in executive pay practices in China (i.e., enhancing the optimality of CEO pay contracts while lessening the influence of managerial power). However, I find no evidence that optimal contracting improves following IFRS-like accounting standard implementation. Specifically, the association between ROA and CEO pay does not become stronger, managerial skill and other performance metrics do not become more important, and the importance of CEO power does not diminish. A potential explanation of my findings is that Chinese firms mechanically adopted the government's explicit call for using ROA as a compensation metric and other reforms, but did not venture further in the pursuit of optimal contracts. Accordingly, the Chinese government could enhance the positive impacts of its governance reforms by assisting and encouraging firms in their implementation.

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