This paper examines the effect that venture capital (VC) has on the pay-performance relationship in listed Chinese firms. We find that VC has a significantly positive effect on CEO compensation and the pay-performance relationship, such effect particularly stronger in firms needing more managerial efforts and discretions (higher growth opportunity or higher levels of capital expenditure). In addition, we show that VC-backed firms with more managerial discretions are more likely to use stock options. The evidence suggests that venture capital investors use more sensitive compensation contract for top executives in Chinese when the need for managerial discretion is greater. Such compensation schemes by VCs enhance firm performance subsequently.