Restricting CEO pay backfires: Evidence from China

Kee Hong Bae*, Zhaoran Gong, Wilson H.S. Tong

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

Using the pay restriction imposed on CEOs of centrally administered state-owned enterprises (CSOEs) in China in 2009, we study the effects of limiting CEO pay. Compared with CEOs of firms not subject to the restriction, the CEOs of CSOEs experienced a significant pay cut. In response to the pay cut, CEOs increased the consumption of perks and siphoned off firm resources for their own benefit. Pay-performance sensitivity for these firms also significantly decreases. The performance of these firms dropped following the pay restriction. Our findings suggest that restricting CEO pay distorts CEO incentives and brings unintended consequences. Our findings caution against limiting CEO pay.
Original languageEnglish
Pages (from-to)1015-1045
Number of pages31
JournalJournal of Business Finance and Accounting
Volume51
Issue number5-6
Early online dateJul 2023
DOIs
Publication statusE-pub ahead of print - Jul 2023

Keywords

  • CEO compensation restriction
  • pay-performance sensitivity
  • perk consumption
  • state-owned enterprises
  • tunneling

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