Performance Measurement and Incentive Compensation: An Empirical Analysis and Comparison of Chinese and Western Firms’ Practices

Posted: 29 May 2011 Last revised: 29 Nov 2011

See all articles by Kenneth A. Merchant

Kenneth A. Merchant

University of Southern California - Leventhal School of Accounting

Wim A. Van der Stede

London School of Economics & Political Science (LSE)

Thomas W. Lin

University of Southern California - Leventhal School of Accounting

Zengbiao Yu

Tsinghua University - School of Economics & Management

Date Written: May 28, 2011

Abstract

This article describes the findings of a study aimed at providing a replication and extension in China of studies focused on incentive compensation practices of automobile retailers in the United States (Gibbs et al., 2004, 2009) and the Netherlands (Jansen et al., 2009). Rich, detailed data sets from all three countries are analyzed together and in comparison. As theory is not well developed at the level of detail of the data collected, the purpose of this study was primarily exploratory, to provide empirics that can lead to the development of theory. The findings show that Chinese firms are much more likely to provide incentive compensation than are Dutch firms, and they are even somewhat more likely to provide them than are U.S. firms. But Chinese bonus plans are more likely to be subjective, rather than formula-based. In the situations where incentive payments are based on pre-set formulas, the Chinese firms’ systems are more like those used in the Netherlands than in the United States, with bonuses based on nonfinancial performance measures and with more complex performance-reward functions. Like managers in the U.S. firms, but unlike managers in the Dutch firms, Chinese managers who receive some form of incentive compensation are more satisfied with their pay. The article concludes with tentative explanations of the findings and suggestions for future research.

Keywords: Performance Measurement, Incentives, Compensation, Bonus, China, Netherlands, United States

JEL Classification: L20, L81, M49, M52, M54

Suggested Citation

Merchant, Kenneth A. and Van der Stede, Wim A. and Lin, Thomas W. and Yu, Zengbiao, Performance Measurement and Incentive Compensation: An Empirical Analysis and Comparison of Chinese and Western Firms’ Practices (May 28, 2011). European Accounting Review, Vol. 20, No. 4, pp. 639-667, 2011. Available at SSRN: https://ssrn.com/abstract=1854884

Kenneth A. Merchant

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-4842 (Phone)
213-747-2815 (Fax)

Wim A. Van der Stede (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 7420 (Fax)

Thomas W. Lin

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Zengbiao Yu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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