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Career Concerns and 'Unpaid' Executives


Chen, Hui; Luo, Wei; Soderstrom, Noemi S (2018). Career Concerns and 'Unpaid' Executives. SSRN 2822979, SSRN eLibrary.

Abstract

A significant portion of CEOs in publicly-listed Chinese state-owned enterprises receive zero pay from the companies for which they work. Instead, they are paid directly by their controlling shareholder who can be the Chinese government or parent firms controlled by the Chinese government. While their actual pay is unobservable, it is known to be low and contain few performance-based incentives. We explore how these parent-paid executives are motivated and whether the outcomes of this unusual incentive differ from conventional compensation. Consistent with career concerns as their main incentive, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. We also conduct an event study using the Split Share Structure Reform in 2005. The reform liberalized the Chinese stock market and enhanced the role of the market mechanisms that potentially replaced promotion incentives in executive compensation contracts. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform. Further analyses indicate that, compared to peers that directly pay their CEOs, firms with parent-paid CEOs have higher return on assets and asset growth, and they experience less tunneling by their shareholders.

Abstract

A significant portion of CEOs in publicly-listed Chinese state-owned enterprises receive zero pay from the companies for which they work. Instead, they are paid directly by their controlling shareholder who can be the Chinese government or parent firms controlled by the Chinese government. While their actual pay is unobservable, it is known to be low and contain few performance-based incentives. We explore how these parent-paid executives are motivated and whether the outcomes of this unusual incentive differ from conventional compensation. Consistent with career concerns as their main incentive, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. We also conduct an event study using the Split Share Structure Reform in 2005. The reform liberalized the Chinese stock market and enhanced the role of the market mechanisms that potentially replaced promotion incentives in executive compensation contracts. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform. Further analyses indicate that, compared to peers that directly pay their CEOs, firms with parent-paid CEOs have higher return on assets and asset growth, and they experience less tunneling by their shareholders.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:21 May 2018
Deposited On:22 Aug 2019 14:43
Last Modified:24 Mar 2020 09:26
Series Name:SSRN
Number of Pages:51
ISSN:1556-5068
Additional Information:AAA 2017 Management Accounting Section (MAS) Meeting
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.2822979
Other Identification Number:merlin-id:18036

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