Agency Theory and Executive Compensation: The Case of Chinese State-Owned Enterprises
Agency Theory and Executive Compensation:
The Case of Chinese State-Owned Enterprises
Taye Mengistae
Development Research Group
The World Bank
Lixin Colin Xu*
Development Research Group
The World Bank
Corresponding Author:
Lixin Colin Xu
MC 3-300
DECRG, The World Bank
1818 H Street, N.W.
Washington, DC 20433
Phone: (202) 473-4664
Fax: (202) 522-1155
Email: LXU1@WORLDBANK.ORG
*
We thank Chong-En Bai for useful discussions, and Canice Prendergast (the editor) and two anonymous referees for constructive comments. Colin Xu also acknowledges the influence of Sherwin
Rosen in spurring his interest in executive compensation. The data set was kindly provided by the Chinese
Academy of Social Science (CASS) and was the result of a survey carried out by the Institute of Economics of the CASS in collaboration with economists from the University of Michigan, University of California,
San Diego and Oxford University. Financial support from the Ford Foundation to organizing the data set is gratefully acknowledged.
1
Agency Theory and Executive Compensation :
The Case of Chinese State-owned Enterprises
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
The Case of Chinese State-Owned Enterprises
Taye Mengistae
Development Research Group
The World Bank
Lixin Colin Xu*
Development Research Group
The World Bank
Corresponding Author:
Lixin Colin Xu
MC 3-300
DECRG, The World Bank
1818 H Street, N.W.
Washington, DC 20433
Phone: (202) 473-4664
Fax: (202) 522-1155
Email: LXU1@WORLDBANK.ORG
*
We thank Chong-En Bai for useful discussions, and Canice Prendergast (the editor) and two anonymous referees for constructive comments. Colin Xu also acknowledges the influence of Sherwin
Rosen in spurring his interest in executive compensation. The data set was kindly provided by the Chinese
Academy of Social Science (CASS) and was the result of a survey carried out by the Institute of Economics of the CASS in collaboration with economists from the University of Michigan, University of California,
San Diego and Oxford University. Financial support from the Ford Foundation to organizing the data set is gratefully acknowledged.
1
Agency Theory and Executive Compensation :
The Case of Chinese State-owned Enterprises
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