CEO Compensation and Corporate Governance in China

Abstract

We analyze CEO pay in China’s public traded firms from 2000 to 2010. We find that Chinese CEO pay is made up mainly of salaries and bonuses. Firms can legally grant stock options since 2005, but the take up of these has been slow. We find that CEO equity ownership is higher in firms with higher CEO pay, more outside directors, combined CEO and chair, compensation committees, and better stock returns. We document that CEO pay is positively correlated to both accounting and stock market performance, although the link to accounting performance is more robust. CEO pay is higher in firms with more growth opportunities, compensation committees, and combined CEO and Chair. We find that CEO pay dynamics are important as pay this year is significantly positively correlated to CEO pay last year. Boards and compensation committees adjust CEO to target levels over a number of years. In addition, our study documents substantial changes in Chinese corporate governance over time. The Chinese State is less likely to be the ultimate owner of public firms, ownership concentration has declined, and internal firm governance has improved significantly as evidenced by a greater fraction of outsiders on the board and the adoption of compensation committees.

Keywords: CEO Pay, Corporate Governance, China