Skip to main content

Advertisement

SpringerLink
Log in

Underpaid and Corrupt Executives in China’s State Sector

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This study examines the role of executive compensation in public governance. We collect data on corruption cases that involve top-level executives in Chinese listed state-controlled firms. We find a significant positive relationship between underpayment of executives and the likelihood of an investigation into corrupt behavior. We also show that corruption is positively associated with firm performance and that the relationship between underpayment of executives and corruption is influenced by firm performance, suggesting that top managers are more likely to engage in illicit behavior if they are compensated poorly while the firms under their control perform well. Finally, we find that pay-performance sensitivity decreases when top executives are involved in corruption investigations, indicating a lack of pecuniary incentives. Our empirical findings point toward an important relationship between executive compensation and corrupt behavior, thus providing valuable input to the understanding of executive pay and its effects in China’s state sector.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Other studies on the compensation-performance relationship include Jensen and Murphy (1990), Mehran (1995), and Barkema and Gomez-Mejia (1998).

  2. The relationship between fiscal decentralization and corrupt behavior is controversial. For more in-depth analyses and discussions on the link between decentralization and corruption, see e.g., Deng et al. (2010) and Ko and Zhi (2013).

  3. For examples of corruption cases tied to Chinese SOEs, see Deng et al. (2010).

  4. The discussion in this section is primarily based on Feng and Johansson’s (2016) description of China’s economic reforms and the labor managerial market in the state sector.

  5. The Shuanggui process is most often conducted in secret and takes place outside ordinary Chinese law enforcement processes. Individuals under investigation are typically isolated from any form of legal counsel and family visits. For more details, see Sapio (2008).

  6. Using alternative event windows such as [−2, −1], [−3, −1], and [−3, −2], where 0 is the year during which the CEO or Chair comes under investigation, does not change the statistical significance of our results.

  7. In contrast to the most top executives in listed firms from developed countries, CEOs and Chairs in Chinese SOEs typically own very few or no shares in the firms they manage.

  8. While studies on executive compensation in the U.S. or European firms mainly focus on the CEO, the institutional setting in China is different in that the Chair of the board has a significant influence on how the firm operates. The CEO and Chair are thus typically the two most influential individuals in Chinese firms. See Feng and Johansson (2016) for a study on executive compensation that similarly focuses on the CEO and the Chair in China.

  9. For more details on the establishment and development of China’s stock exchanges, see Johansson and Ljungwall (2009).

References

  • Adegbite, E. (2015). Good corporate governance in Nigeria: Antecedents, propositions and peculiarities. International Business Review, 24, 319–330.

    Article  Google Scholar 

  • Agbiboa, D. E. (2012). Between corruption and development: The political economy of state robbery in Nigeria. Journal of Business Ethics, 108, 325–345.

    Article  Google Scholar 

  • Argandona, A. (2004). Private-to-private corruption. Journal of Business Ethics, 47, 253–267.

    Article  Google Scholar 

  • Bardhan, P. (1997). Corruption and development: A review of issues. Journal of Economic Literature, 35, 1320–1346.

    Google Scholar 

  • Barkema, H. G., & Gomez-Mejia, L. R. (1998). Managerial compensation and firm performance: A general research framework. Academy of Management Journal, 41, 135–145.

    Google Scholar 

  • Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17, 71–92.

    Article  Google Scholar 

  • Benmelech, E., Kandel, E., & Veronesi, P. (2010). Stock-based compensation and CEO (dis)incentives. Quarterly Journal of Economics, 125, 1769–1820.

    Article  Google Scholar 

  • Bertrand, M., & Mullainathan, S. (2001). Are CEOs rewarded for luck? The ones without principals are. Quarterly Journal of Economics, 116, 901–932.

    Article  Google Scholar 

  • Besley, T., & McLaren, J. (1993). Taxes and bribery: The role of wage incentives. Economic Journal, 103, 119–141.

    Article  Google Scholar 

  • Bishara, N. D., & Schipani, C. A. (2009). Strengthening the ties that bind: Preventing corruption in the executive suite. Journal of Business Ethics, 88, 765–780.

    Article  Google Scholar 

  • Burns, N., & Kedia, S. (2006). The impact of performance-based compensation on misreporting. Journal of Financial Economics, 79, 35–68.

    Article  Google Scholar 

  • Chen, D. (1995). Chinese firms between hierarchy and market: The contract management responsibility system. London: Macmillan.

    Book  Google Scholar 

  • Chen, F. (2000). Subsistence crises, managerial corruption and labor protests in China. China Journal, 44, 41–63.

    Article  Google Scholar 

  • Choe, C., & Yin, X. (2000). Contract management responsibility system and profit incentives in China’s state-owned enterprises. China Economic Review, 11, 98–112.

    Article  Google Scholar 

  • Coase, R. H. (1979). Payola in radio and television broadcasting. Journal of Law and Economics, 22, 269–328.

    Article  Google Scholar 

  • Collins, J. D., Uhlenbruck, K., & Rodriguez, P. (2009). Why firms engage in corruption: A top management perspective. Journal of Business Ethics, 87, 89–108.

    Article  Google Scholar 

  • Deng, X., Zhangh, L., & Leverentz, A. (2010). Official corruption during China’s economic transition: Historical patterns, characteristics, and government reactions. Journal of Contemporary Criminal Justice, 26, 72–88.

    Article  Google Scholar 

  • Denis, D. J., Hanouma, P., & Sarin, A. (2006). Is there a dark side to incentive compensation? Journal of Corporate Finance, 12, 467–488.

    Article  Google Scholar 

  • Ding, X. L. (2000). The illicit asset stripping of Chinese state firms. China Journal, 43, 1–28.

    Article  Google Scholar 

  • Fan, J. P. H., Wong, T. J., & Zhang, T. (2007). Politically connected CEOs, corporate governance, and Post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84, 330–357.

    Article  Google Scholar 

  • Feng, X., & Johansson, A. C. (2016). CEO incentives in Chinese state-controlled firms. Economic Development and Cultural Change, forthcoming.

  • Firth, M., Fung, P., & Rui, O. M. (2006). Corporate performance and CEO compensation in China. Journal of Corporate Finance, 12, 693–714.

    Article  Google Scholar 

  • Garen, J. E. (1994). Executive compensation and principal–agent theory. Journal of Political Economy, 102, 1175–1199.

    Article  Google Scholar 

  • Gopinath, C. (2008). Recognizing and justifying private corruption. Journal of Business Ethics, 82, 747–754.

    Article  Google Scholar 

  • Groenendijk, N. (1997). A principal–agent model of corruption. Crime, Law and Social Change, 27, 207–229.

    Article  Google Scholar 

  • Habib, M., & Zurawicki, L. (2002). Corruption and foreign direct investment. Journal of International Business Studies, 33, 291–307.

    Article  Google Scholar 

  • Husted, B. W. (1999). Wealth, culture, and corruption. Journal of International Business Studies, 30, 339–359.

    Article  Google Scholar 

  • Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3, 305–360.

    Article  Google Scholar 

  • Jensen, M., & Murphy, K. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98, 225–264.

    Article  Google Scholar 

  • Johansson, A. C., & Ljungwall, C. (2009). Spillover effects among the Greater China stock markets. World Development, 37, 839–851.

    Article  Google Scholar 

  • Johnson, S. A., Ryan, H. E, Jr, & Tian, Y. S. (2009). Managerial incentives and corporate fraud: The sources of incentives matter. Review of Finance, 13, 114–145.

    Article  Google Scholar 

  • Johnston, M., & Hao, Y. (1995). China’s surge of corruption. Journal of Democracy, 6, 80–94.

    Article  Google Scholar 

  • Kato, T., & Long, C. (2006a). CEO turnover, firm performance, and enterprise reform in China: Evidence from micro data. Journal of Comparative Economics, 34, 796–817.

    Article  Google Scholar 

  • Kato, T., & Long, C. (2006b). Executive compensation, firm performance, and corporate governance in China: Evidence from firms listed in the Shanghai and Shenzhen stock exchanges. Economic Development and Cultural Change, 54, 945–983.

    Article  Google Scholar 

  • Kato, T., & Long, C. (2006c). Executive turnover and firm performance in China. American Economic Review Papers and Proceedings, 96, 363–367.

    Article  Google Scholar 

  • Klitgaard, R. E. (1988). Controlling corruption. Berkley, CA: University of California Press.

    Google Scholar 

  • Koo, A. Y. C. (1990). The contract responsibility system: Transition from a planned to a market economy. Economic Development and Cultural Change, 38, 797–820.

    Article  Google Scholar 

  • Ko, K., & Zhi, H. (2013). Fiscal decentralization: Guilty of aggravating corruption in China? Journal of Contemporary China, 22, 35–55.

    Article  Google Scholar 

  • Lau, C. M., Fan, D. K. K., Young, M. N., & Wu, S. (2007). Corporate governance effectiveness during institutional transition. International Business Review, 16, 425–448.

    Article  Google Scholar 

  • Lau, L. J., Qian, Y., & Roland, G. (2000). Reform without losers: An interpretation of China’s dual-track approach to transition. Journal of Political Economy, 108, 120–143.

    Article  Google Scholar 

  • Li, K.-W. (2001). The two decades of China’s economic reform compared. World Economy and China, 9, 55–60.

    Google Scholar 

  • Liao, G., Chen, X., Jing, X., & Sun, J. (2009). Policy burdens, firm performance, and management turnover. China Economic Review, 20, 15–28.

    Article  Google Scholar 

  • Lin, J. Y., Cai, F., & Li, Z. (1998). Competition, policy burdens, and state-owned enterprise reform. American Economic Review, 88, 422–427.

    Google Scholar 

  • Lin, Y., & Li, Z. (2008). Policy burden, privatization and soft budget constraint. Journal of Comparative Economics, 36, 90–102.

    Article  Google Scholar 

  • Lin, J. Y., & Tan, G. (1999). Policy burdens, accountability, and the soft budget constraints. American Economic Review, 89, 426–431.

    Article  Google Scholar 

  • Lipton, D., & Sachs, J. (1990a). Creating a market economy in Eastern Europe: The case of Poland. Brooking Institution Papers on Economic Activity, 1, 75–133.

    Article  Google Scholar 

  • Lipton, D., & Sachs, J. (1990b). Privatization in Eastern Europe: The case of Poland. Brooking Institution Papers on Economic Activity, 2, 293–341.

    Article  Google Scholar 

  • Liu, C. N. (1993). The incentive structures of China’s enterprises under contract responsibility systems. Journal of Contemporary China, 2, 69–81.

    Article  Google Scholar 

  • Manion, M. (2004). Corruption by design: building clean government in Mainland China and Hong Kong. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • McMillan, J., & Naughton, B. (1992). How to reform a planned economy: Lessons from China. Oxford Review of Economic Policy, 8, 130–143.

    Article  Google Scholar 

  • Mehran, H. (1995). Executive compensation structure, ownership, and firm performance. Journal of Financial Economics, 38, 163–184.

    Article  Google Scholar 

  • Mengistae, T., & Xu, L. C. (2004). Agency theory and executive compensation: The case of Chinese state-owned Enterprises. Journal of Labor Economics, 22, 615–637.

    Article  Google Scholar 

  • Naughton, B. (2004). Market economy, hierarchy, and single party rule: How does the transition path in China shape the emerging market economy? Hong Kong: International Economic Association.

    Google Scholar 

  • Naughton, B. (2007). The Chinese economy: Transition and growth. Cambridge, MA: MIT Press.

    Google Scholar 

  • Oi, J. C. (1991). Partial market reform and corruption in rural China. In R. Baum (Ed.), Reform and reaction in post-Mao China: The road to Tiananmen (pp. 143–161). New York, NY: Routledge.

    Google Scholar 

  • Oldenburg, P. (1987). Middlemen in third-world corruption: Implications of an Indian case. World Politics, 39, 508–535.

    Article  Google Scholar 

  • Peng, L., & Röell, A. (2008). Executive pay and shareholder litigation. Review of Finance, 12, 141–184.

    Article  Google Scholar 

  • Perkins, D. H. (1988). Reforming China’s economic system. Journal of Economic Literature, 26, 601–645.

    Google Scholar 

  • Perkins, D. H. (1994). Completing China’s move to the market. Journal of Economic Perspectives, 8, 23–46.

    Article  Google Scholar 

  • Qian, Y. (1994). A theory of shortage in socialist economies based on the soft budget-constraint. American Economic Review, 84, 145–156.

    Google Scholar 

  • Rodriguez, P., Uhlenbruck, K., & Eden, L. (2005). Government corruption and the entry strategies of multinationals. Academy of Management Review, 30, 383–396.

    Article  Google Scholar 

  • Rose-Ackerman, S. (1978). Corruption: A study in political economy. New York: Academic Press.

    Google Scholar 

  • Sachs, J. (1992). The economic transformation of Eastern Europe: the case of Poland. Economics of Planning, 25, 5–19.

    Google Scholar 

  • Sapio, F. (2008). Shuanggui and extralegal detention in China. China Information, 22, 7–37.

    Article  Google Scholar 

  • Shleifer, A., & Vishny, R. W. (1993). Corruption. Quarterly Journal of Economics, 108, 599–617.

    Article  Google Scholar 

  • Stark, A. (1997). Beyond quid pro quo: What’s wrong with private gain from public office? American Political Science Review, 91, 108–120.

    Article  Google Scholar 

  • Sun, Q., & Tong, W. H. S. (2003). China share issue privatization: The extent of its success. Journal of Financial Economics, 70, 183–222.

    Article  Google Scholar 

  • Wall Street Journal, 2014. China seeks to rein in executive pay at state-controlled companies. Wall Street Journal, August 18.

  • Warren, D. E., & Laufer, W. S. (2009). Are corruption indices a self-fulfilling prophecy? A social labeling perspective of corruption. Journal of Business Ethics, 88, 841–849.

    Article  Google Scholar 

  • Wedeman, A. (2004). The intensification of corruption in China. China Quarterly, 180, 895–921.

    Article  Google Scholar 

  • Wedeman, A. (2005). Anticorruption campaigns and the intensification of corruption in China. Journal of Contemporary China, 14, 93–116.

    Article  Google Scholar 

  • Xu, L. C. (1998). Determinants of the repartitioning of property rights between the government and state enterprises. Economic Development and Cultural Change, 46, 537–560.

    Article  Google Scholar 

  • Yu, O. (2008). Corruption in China’s economic reform: a review of recent observations and explanations. Crime, Law and Social Change, 50, 161–176.

    Article  Google Scholar 

Download references

Funding

Feng acknowledges financial support from the National Natural Science Foundation of China (71302049).

Author information

Authors and Affiliations

  1. Southwestern University of Finance and Economics, Chengdu, China

    Xunan Feng

  2. Stockholm School of Economics, 6501, 113 83, Stockholm, Sweden

    Anders C. Johansson

Authors
  1. Xunan Feng
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Anders C. Johansson
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Anders C. Johansson.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Feng, X., Johansson, A.C. Underpaid and Corrupt Executives in China’s State Sector. J Bus Ethics 150, 1199–1212 (2018). https://doi.org/10.1007/s10551-016-3190-y

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-016-3190-y

Keywords

JEL Classification

Search

Navigation