Restricting CEO Pay Backfires: Evidence from China

55 Pages Posted: 8 Dec 2017 Last revised: 21 Jun 2019

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Zhaoran Gong

Hong Kong Polytechnic University - School of Accounting and Finance

Wilson Tong

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: June 19, 2019

Abstract

Using the pay restriction imposed on CEOs of centrally administered state-owned enterprises (CSOEs) in China in 2009, we study the effects of limiting CEO pay. Compared with firms not subject to the restriction, the CEOs of CSOEs experience a significant pay cut. In response to the pay cut, CEOs increase their consumption of perks and siphon off firm resources for their own benefit. Ultimately, the performance of these firms drops significantly following the pay restriction. Our findings suggest that restricting CEO pay distorts CEO incentives and brings unintended consequences. Our findings caution against limiting the pay of CEOs.

Keywords: executive compensation; pay restriction; perk consumption; tunnelling

Suggested Citation

Bae, Kee-Hong and Gong, Zhaoran and Tong, Wilson, Restricting CEO Pay Backfires: Evidence from China (June 19, 2019). Available at SSRN: https://ssrn.com/abstract=3081822 or http://dx.doi.org/10.2139/ssrn.3081822

Kee-Hong Bae (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Zhaoran Gong

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Wilson Tong

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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