Like other major countries in the world, Chinese listed firms have recently experienced a dramatic rise in executive compensation. However, the arguments that could explain the same phenomena in developed countries can not be extended to the case in China. First, most Chinese listed firms are controlled by the state, thus management cannot set their own compensations through captured boards as suggested by Bebchuk and Fried (2004). Second, very few listed firms in China granted stock options and/or common stocks as part of executive compensations prior to 2005. There is little possibility that executives increased their own compensations by offering stock-option plans implied by Bolton et al. (2006). Based on the facts that the legal investor protection has been improved in China, we argue theoretically and empirically in this paper that the rise in executive compensation of Chinese listed firms can be attributed to the enhancement of legal investor protection. Since the management has to give up part of their private benefit with the improvement of legal investor protection, some private benefits extracted by management before have to be paid in an explicit way in order to make management incentive compatible. This finding partially leads to the increasing trend in executive compensations. It therefore provides a new perspective to explain why executive compensations keep rising in this emerging market where legal investor protection has been improving.