Executive compensation, firm performance, and corporate governance in China: Evidence from firms listed in the Shanghai and Shenzhen Stock Exchanges

The nature of the pay-performance link for top management in group of firms from the largest transition economy in the world, China, was studied. An attempt was made to explore how these firms relate their executive compensation to their form performance and how such relationships are influenced by their ownership structure. Consistently for firms listed in China's emerging stock market, statistically significant sensitivities and elasticities of cash compensation for the highest-paid executives with respect to shareholder value were found. The size of the estimated sensitivities and elasticities was comparable to or greater than what has been found for other countries namely the United States, Japan, and Korea. Furthermore, sales growth was found to be linked to executive compensation in China's listed firms and that Chinese executives are penalized for making negative profits although they are neither penalized nor rewarded for changes in profit insofar as it is positive.