Restricting CEO Pay Backfires: Evidence from China

Restricting CEO Pay Backfires: Evidence from China

Kee-Hong Bae, Zhaoran Gong, Wilson H.S. Tong

Series number :

Serial Number: 
670/2020

Date posted :

April 10 2020

Last revised :

April 10 2020
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Keywords

  • executive compensation • 
  • pay restriction • 
  • perk consumption • 
  • tunnelling

Using the pay restriction imposed on CEOs of centrally administered state-owned enterprises (CSOEs) in China in 2009, we study the effects of limiting CEO pay. Compared with CEOs of firms not subject to the restriction, the CEOs of CSOEs experienced a significant pay cut. In response to the pay cut, CEOs increased the consumption of perks and siphoned off firm resources for their own benefit.

Ultimately, the performance of these firms dropped following the pay restriction. Our findings suggest that restricting CEO pay distorts CEO incentives and brings unintended consequences. Our findings caution against limiting CEO pay.
 

Authors

Real name:
Kee-Hong Bae
Real name:
Zhaoran Gong
Real name:
Wilson H.S. Tong