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.

This paper investigates CEO pay and pay-performance relationship in China’s listed firms. We distinguish four firm types based on their controlling owners: state owned enterprises affiliated with state asset management bureaus (SAMBs), state owned enterprises affiliated with the central government (SOECGs), state owned enterprises affiliated with a local government (SOELGs), and private firms controlled by private investors. We also distinguish between firms with foreign investors and those without. Because the different types of controlling owners have different objectives, motivations, and political interests, they affect managers’ compensation in the firms in which they invest. Our results indicate that CEO pay is lowest in SAMB controlled firms and highest in SOECG controlled firms. Not only is CEO pay positively associated with firm performance, the positive pay-performance relationship is stronger in both types of SOE firms but weaker in privately controlled firms. In addition, firms with foreign investors compensate their CEOs more highly than those without foreign investors, an effect that is significant in both SOEs and privately controlled firms. Overall, the evidence suggests that CEO compensation in China is jointly determined by firm performance, market-oriented reform and the unique ownership structure, meaning that standard theories of efficient compensation contracts may not apply in such emerging markets.

This study analyzes the effect of social pressures on CEO compensation focusing on social interactions within 60 miles of the firm. Social premiums in CEO pay are in excess of what can be explained by firm performance and characteristics, corporate governance, and local economic variables. Using the S&P 500 companies during 1994-2005, we show that the average social premium in a social circle with 31 CEOs (the 75th percentile of social circles) is $1.29 million higher than that in a circle with six CEOs (the 25th percentile). Golfing, sharing directors, and comparing mansions are likely avenues of social interactions.

Standard principal-agent theory predicts that the pay-performance sensitivity (PPS) decreases in the risk of the firm. An alternative literature argues that entrenched executives as in weakly governed firms use compensation contract to extract the rent, which renders risk irrelevant in determining PPS. This paper uses event study approach to test both principal-agent model and CEO power theory by studying changes in executives’ compensation contract around litigation events. Consistent with principalagent model prediction, we find that, after the initiation of litigation, PPS drops, compensation shifts from performance-sensitive component (equity) to performanceinvariant component (cash). In addition, all the changes reverse themselves after litigation settlements. To test CEO power theory, we further partition the event firms into firms with good and bad corporate governance. We find that the PPS in firms with bad corporate governance increases after lawsuit and decreases after the settlement. This suggests that litigation brings the bad compensation practice of poorly governed firms to the limelight and forces firms to discipline their CEOs temporarily during the litigation period (so called “limelight effect”), which lends indirect support to CEO power theory. Our results are robust to a battery of sensitivity tests including two endogeneity tests.

This study analyzes the effect of social pressures on CEO compensation focusing on social interactions within 60 miles of the firm. Social premiums in CEO pay are in excess of what can be explained by firm performance and characteristics, corporate governance, and local economic variables. Using the S&P 500 companies during 1994-2005, we show that the average social premium in a social circle with 31 CEOs (the 75th percentile of social circles) is $1.29 million higher than that in a circle with six CEOs (the 25th percentile). Golfing, sharing directors, and comparing mansions are likely avenues of social interactions.

We explore whether compensation policies in bidding firms counter or exacerbate agency conflicts by examining CEO pay and incentives around corporate takeovers. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. In the years following mergers, CEOs of poorly performing firms receive substantial increases in option and stock grants that offset any effect of long-term underperformance on their wealth. As a result, the CEO’s pay and his overall wealth become insensitive to negative stock performance, but his wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs’ compensation to poor performance following the acquisition. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures, and that they receive only minor downside protection. Our results highlight that acquisitions are treated differently from other capital investments by the board in setting CEO compensation and our evidence is consistent with the self-serving management hypothesis in corporate acquisitions.