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The effect of firm performance on CEO compensation: the moderation role of SOE reform

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Abstract

As corporations expand, the owners (principals) delegate managers (agents) to manage their wealth on their behalf. Ceding the management authority to others means shareholders must institute mechanisms that keep their interests aligned with those of managers. One of such corporate governance mechanism that helps with the interest alignment goal is the compensation of Chief Executive Officers (CEOs). Although there are some previous studies on CEOs’ compensation, results from these studies are mixed. Most corporate governance studies suffer from endogeneity problems. Resultantly, the current study uses the dynamic panel system generalized methods of moments (SGMM) estimator to examine the moderation effect of SOE reforms on the nexus between firm performance and CEO compensation using a sample of 1265 non-financial public limited companies on the China Stock Market from 2010 to 2016. The result from the study shows that both current and past firm performances positively influence executive compensation contracts. Although the Renewed Mixed-Ownership Reform was launched at the 18th National Congress of the Chinese Communist Party in 2012, its influence on executive compensation began to have material effect after issuing the operational guidelines in 2015. State ownership continued to decrease but remaining high only in strategic sectors. Finally, the extensive reforms positively influenced state ownership as an important governance mechanism in CEO compensation contracts after 2015.

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Fig. 1

Source: Data are from Thompson DataStream (2010–2016)

Fig. 2

Source: Data are from Thompson DataStream (2010–2016)

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Notes

  1. China’s economic rise: history, trends, challenges, and implications for the United States https://www.everycrsreport.com/reports/RL33534.html.

  2. Calculated as (\({\mathrm{e}}^{0.077}-1\)).

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Acknowledgements

This study funded by the National Natural Science Foundation of China (No. 71774071), and the Academic Research Project of Jiaxing University (ICCPR2021007).

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Authors and Affiliations

  1. School of Finance and Economics, Jiangsu University, 301 Xuefu Road, Zhenjiang, People’s Republic of China

    Ngonadi Josiah Chukwuma, Takuriramunashe Famba, Huaping Sun & Ophias Kurauone

  2. Institute for China Common Prosperity Research, Jiaxing University, Jiaxing, 314001, People’s Republic of China

    Huaping Sun

  3. School of Mathematics, Institute of Applied System Analysis (IASA), Jiangsu University, Zhenjiang, 212013, People’s Republic of China

    Isaac Adjei Mensah

  4. School of Business, Nanjing University of Information Science and Technology, Nanjing, 210044, People’s Republic of China

    Liang Li

  5. Faculty of Commerce and Law, Zimbabwe Open University, Mutare, Zimbabwe

    Grace Chituku-Dzimiro

Authors
  1. Ngonadi Josiah Chukwuma
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  2. Takuriramunashe Famba
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  3. Huaping Sun
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  4. Isaac Adjei Mensah
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  5. Ophias Kurauone
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  6. Liang Li
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  7. Grace Chituku-Dzimiro
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Contributions

N.J.C.: original draft, conceptualization, methodology, format analysis, writing. T.F.: writing, review. H.P.S.: supervision, writing—review. I. A. M.: conceptualization, methodology, data curation, writing—review. O.K.: Writing—review. L.L.: Writing—review and editing. G.C.D: Writing—review and editing.

Corresponding authors

Correspondence to Takuriramunashe Famba, Huaping Sun or Liang Li.

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Chukwuma, N.J., Famba, T., Sun, H. et al. The effect of firm performance on CEO compensation: the moderation role of SOE reform. SN Bus Econ 1, 158 (2021). https://doi.org/10.1007/s43546-021-00160-8

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