Incentivizing digitalization: CEO compensation and digitalization in China's A-share corporate landscape

Abstract

Executives’ compensation structures can strongly affect the ability and readiness of companies to undertake digital transformation (DT) initiatives. This study investigates the intricate dynamics among CEO compensation and DT within Chinese public companies over the period from 2010 to 2023. The analysis identified three principal findings. Firstly, there is a positive association between the CEO paygap and DT, indicating that greater compensation disparities incentivize CEOs to pursue technological advancements. Secondly, managerial shareholding significantly positively moderates this relationship, likely due to the alignment of managerial and shareholder interests. Thirdly, this influence is more pronounced in state-owned enterprises compared to non-state-owned enterprises. This could be due to different governance structures and objectives in state-owned entities. Moreover, government regulations aimed at controlling CEO compensation are found to dampen DT efforts, suggesting that such constraints might hinder digital innovation. Channel analysis reveals agency costs and audit quality as key mediators that help to align the CEOs interests in support of DT. Various methodological approaches, such as instrumental variables (IV) and propensity score matching (PSM), validate the robustness of these results. Findings highlight the need for a balanced approach to CEO compensation and regulation to foster DT. Policymakers should consider the potential unintended consequences of stringent compensation regulations on technological advancement. Companies are encouraged to align managerial incentives with shareholder interests through shareholding schemes to enhance DT efforts. These findings provide a framework for comprehending and managing executive compensation dynamics in the context of digital transformation.