Government controlling ownership and CEO compensation incentives: evidence from China

This paper investigates the relationship between government-controlling ownership and CEO compensation incentives in China, using a comprehensive evaluation of CEO pay-performance sensitivity (PPS). We find that government-controlling ownership weakens CEO PPS, with PPS being around 6 lower for CEOs in state-owned enterprises (SOEs) than CEOs in non-state-owned enterprises (non-SOEs), representing a reduction of around 14% for a CEO with the average level of PPS. The results sustain after using privatization as the experiment setting wherein firms' ultimate controllers changed from government owners to private owners. Moreover, the negative influence of government controlling ownership on CEO compensation incentives is more prominent in SOEs with a higher level of government ownership or a lower hierarchy government as the controller. We also explore the association between CEO incentives and firm performance and find that PPS in SOEs is more important in association with firms' stock performance than non-SOEs. Results in this paper extend studies on the influence of government controlling ownership on CEO compensation incentives, an issue that is caught much attention in the ongoing reform of China's SOEs.