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, which can be the Chinese government or parent firms that are controlled by the Chinese government. We explore how these “unpaid” executives are motivated and whether the outcomes of this unusual incentive mechanism differ from the conventional approach. Consistent with career concerns as their main incentive mechanism, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. This result holds when we look at subsamples in which individual CEOs switch payment regimes. We also find that compared to their peers with paid CEOs, firms with unpaid CEOs in general have higher return on assets, higher asset turnover, higher asset growth, and engage in less tunneling.
To mitigate concerns of that our results are driven by CEO selection and to further investigate the use of implicit incentives, we conduct an event study using the Split Share Structure Reform in 2006. The Reform liberalized the Chinese stock market, thus strengthening the role of the market as an incentive mechanism. This mechanism provides a potential replacement for promotion incentives. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform.