Restricting CEO Pay Backfires: Evidence from China
55 Pages Posted: 8 Dec 2017 Last revised: 21 Jun 2019
Date Written: June 19, 2019
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
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