Restricting CEO Pay Backfires: Evidence from China

Forthcoming in Journal of Business Finance and Accounting

European Corporate Governance Institute – Finance Working Paper No. 670/2020

71 Pages Posted: 8 Dec 2017 Last revised: 17 Jul 2023

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Zhaoran Gong

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou

Wilson Tong

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: June 19, 2023

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 CEOs of firms not subject to the restriction, the CEOs of CSOEs experienced a significant pay cut. In response to the pay cut, CEOs increased the consumption of perks and siphoned off firm resources for their own benefit. Ultimately, the performance of these firms dropped following the pay restriction. Our findings suggest that restricting CEO pay distorts CEO incentives and brings unintended consequences. Our findings caution against limiting CEO pay.

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

JEL Classification: G15, G34, M12

Suggested Citation

Bae, Kee-Hong and Gong, Zhaoran and Tong, Wilson, Restricting CEO Pay Backfires: Evidence from China (June 19, 2023). Forthcoming in Journal of Business Finance and Accounting, European Corporate Governance Institute – Finance Working Paper No. 670/2020, 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

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou ( email )

111 Ren'ai Road
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

Wilson Tong

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

Hung Hom
Kowloon
Hong Kong

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