EXECUTIVE COMPENSATION AND PERFORMANCE OF CHINESE LISTED COMPANIES IN SHANGHAI AND SHENZHEN STOCK EXCHANGE

Abstract

Enterprise reforms in China took huge strides since the introduction of Corporate Law reforms in 1993, and the setting up of the State-owned Assets Supervision and Administration Commission (SASAC) in 2002 served to push forward enterprise restructuring so that Chinese listed companies are capable of competing in the global arena. Within this enterprise reform framework, the Chinese authorities have appropriately endeavoured to implement the “human capital, strengthening enterprises” strategy to maximise the potential of the abundant human capital available in China. As a result of agency problem, there is a common misalignment of interests between top executives and owners. To mitigate this, performance-based compensation reforms are in place to motivate executives for better company performances. However, before such a strategy is implemented, we should first ascertain if these top executives can be motivated for better future performances with improvements in their current compensation packages. From a reverse perspective, it is also pertinent for us to understand if such a performance-linked compensation reform is well established in China, to reveal the maturity of compensation reforms that are currently in place. My results support the hypotheses. Top executives in China are shown to display positive performances when their compensation is improved; and similarly, there exists a strong pay-for-performance correlation between changes in ROA and ROE with subsequent executive compensation. This shed light that China is heading towards the right reform direction to maintain its competitiveness in the world economy.