Agency Theory and Executive Compensation: The Case of Chinese State-Owned Enterprises

33 Pages Posted: 2 Jan 2003

See all articles by Taye Mengistae

Taye Mengistae

World Bank

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Date Written: 2002

Abstract

This paper examines the extent to which agency theory may explain CEO compensation in state-owned enterprises (SOEs) in China during the 1980s. We find that the sensitivity of CEO pay to firm performance decreases with the variance of performance. This is consistent with the prediction of a tradeoff between incentives and insurance in agency theory. On the other hand, the data lend little support to the relative performance evaluation hypothesis. We also find that the performance sensitivity of CEO pay increases with the marginal return to executive action, that is, pay sensitivity increases with managerial control rights, worker incentives, profit retention rates of firms, and the degree of product market competition faced by the firm. While the elasticity of pay to sales is slightly smaller than that found in the literature on conventional firms in the West generally, our estimate of the semi-elasticity of pay with respect to profitability is comparable to estimates for regulated industries in the United States.

Keywords: CEO compensation, agency theory, relative performance model, SOEs, China

JEL Classification: D2, G3, J3, L2, L3, P5

Suggested Citation

Mengistae, Taye Alemu and Xu, Lixin Colin, Agency Theory and Executive Compensation: The Case of Chinese State-Owned Enterprises (2002). Available at SSRN: https://ssrn.com/abstract=364161 or http://dx.doi.org/10.2139/ssrn.364161

Taye Alemu Mengistae

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Lixin Colin Xu (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

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