Do Managers Perform for Perks?

Abstract

We examine how the managerial consumptions of perquisites are determined and whether and how they impact firm value. On the one hand, if the consumptions of perks are a result of agency cost, then they likely represent managerial excesses that expropriate shareholder wealth and they destroy firm value. On the other hand, when the transaction cost of monetary compensations is high due to information asymmetry, government regulations and media scrutiny, perks can provide incentives that motivate managers to work harder to create shareholder wealth and they potentially enhance firm value. The Chinese economic environment provides a unique opportunity to examine this research topic this is of universal interest. Using manually - collected data on direct monetary compensations and perks, we find that perks are provided when the relative pay between top managers and average employees is low, in firms with high economic rent and growth. Further, perks are positively associated with future firm value, but to a much lesser extent than monetary compensations. Therefore, perks appear to motivate managers to work harder to create shareholder wealth but are not as effective as monetary compensations. Finally, the effect of perks is more pronounced for firms with high economic rent, high growth and low relative pay between top managers and average employees.

Keywords: compensations, perks, performance

JEL Classification: G30, G38, M41