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Underpaid and Corrupt Executives in China’s State Sector

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.

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Notes

  1. 1.

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

  2. 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. 3.

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

  4. 4.

    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).

  5. 5.

    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.

  6. 6.

    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.

  7. 7.

    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.

  8. 8.

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

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Funding

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

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Correspondence to Anders C. Johansson.

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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

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Keywords

  • Corruption
  • Compensation
  • Executives
  • Incentives
  • State sector
  • China

JEL Classification

  • D73
  • G38
  • J30
  • M52
  • P30