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Informativeness of performance measures and Chinese executive compensation

Abstract

We provide evidence on the use of accounting versus stock market performance measures as determinants of Chinese top managers’ compensation over 2001–2007. We theorize and find that (1) accounting returns are weighted more heavily in general than stock returns in determining top executive compensation, (2) state-owned enterprises (SOEs) rely significantly less on stock market returns than do non-SOEs, (3) firms located in high marketization regions rely more heavily on stock market returns to reward managers, and (4) firms with better internal governance quality rely more on stock returns to reward executives. We discuss our findings with particular reference to the Chinese context of our research.

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Notes

  1. It is important to comment on the quality of the data. The GTA and CSMAR-A data are collected directly from public firms’ annual financial reports published in Securities Time, Shanghai Securities Daily, China Securities Daily, and other major newspapers designated by the CSRC for listed firms to disclose financial and related information. GTA claims that rigorous double-checking has been performed to ensure coding accuracy and the integrity of the data.

  2. Conyon and He (2012) reported that the rate of equity grants is very small in China. In 2005, only .15 % of firms grant equity to their executives. The number is 2.23 % in 2006, and .65 % in 2007. As a result, excluding the fair-market value of equity incentive grants from our total compensation measures should not materially affect our results.

  3. The CSRC classifies Chinese industries into 22 categories: 1: Agriculture and fishery; 2: Mining; 30: Manufacturing-Food/beverage; 31: Manufacturing-Textiles; 32: Manufacturing-Furniture; 33:Manufacturing-Paper/Printing; 34: Manufacturing-Petroleum; 35: Manufacturing-Electronic; 36: Manufacturing-Metal/Non-metal; 37: Manufacturing-Machines; 38: Manufacturing-Pharmaceutical; 39: Manufacturing-Others; 4: Electricity, water and other energy manufacturing and supply; 5: Construction; 6: Transportation and logistics; 7: Information technology; 8: Wholesales and retails; 9: Finance and insurance; 10: Real estate; 11: Service; 12: Communication; 13: Others.

  4. In unreported sensitivity analysis, we also conduct analysis using the raw data. The results are qualitatively the same as our main results reported in this paper.

  5. The GTA data report the type of the ultimate owner (controlling shareholder) for each listed firms. We code SOE as 1 when the reported controlling shareholder is the state and 0 otherwise. This classification is consistent with previous empirical Chinese compensation literature using the GTA database (e.g., Conyon & He, 2011, 2012; Chen et al., 2010; Wang & Xiao, 2011).

  6. The NERI index reports marketization level of four direct-controlled municipalities and 27 provinces. The four direct-controlled municipalities are Beijing, Shanghai, Tianjin, and Chongqing. The 27 mainland provinces (excluding Taiwan, Hong Kong, and Macau) include Anhui, Fujian, Gansu, Guangdong, Guangxi, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Neimeng (Inner Mongolia), Ningxia, Qinghai, Sangxi, Shandong, Shanxi, Sichuan, Xizang (Tibet), Xinjiang, Yunnan, and Zhejiang.

  7. China has a two-tier board structure including both the board of directors and the supervisory board. In addition to the board of directors elected by shareholders, the Chinese Corporate Law also requires Chinese firms to set up a supervisor board, whose members are representatives of both shareholders and employees. The supervisory board is in charge of supervising the directors and top management as well as examining financial conditions of the company (Ding et al., 2010b).

  8. The distribution of unique sample firms in each industry is summarized as follows: Agriculture 35; Communication 15; Construction 35; Finance 29; Information technology 98; Electronic manufacturing 69; Food/Beverage manufacturing 64; Furniture manufacturing 5; Machines manufacturing 142; Paper/Printing manufacturing 28; Petroleum manufacturing 170; Pharmaceutical manufacturing 99; Textiles manufacturing 61; Other manufacturing 14; Mining 43; Real estate 103; Services 47; Transportation 67; Utilities 64; Wholesale & retail 99; Others 77.

  9. The sharp increase in the proportion of independent directors on the board is caused by a CSRC regulation issued in 2001, which requires that at least one-third of the directors must be independent by June, 30, 2003.

  10. The title “Chief Executive Officer” or “CEO” is not commonly used in the GTA data set. In this study we identify the CEO position by the title “General Manager” or “President.” This captures most CEOs. We also manually checked other titles such as “Administrative President” and “Executive President” in cases where current CEO compensation data was missing.

  11. We would like to thank an anonymous reviewer for this point.

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Correspondence to Lerong He.

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Cordeiro, J.J., He, L., Conyon, M. et al. Informativeness of performance measures and Chinese executive compensation. Asia Pac J Manag 30, 1031–1058 (2013). https://doi.org/10.1007/s10490-013-9353-9

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Keywords

  • Executive compensation
  • Performance measures
  • China
  • Corporate governance
  • Marketization
  • Institutions