An Empirical Investigation of Incentive Plan with Relative Performance Measure: Evidence from China's Listed State-Owned Enterprises

This paper investigates the usefulness of relative performance evaluation (RPE) for the incentive scheme in an undeveloped economy lacking market-based competition. In a sample of China’s listed state-owned enterprises (SOEs) during 2001-2005, 41% of the Chairmen of the Board or CEOs who left the office have been promoted, by definition, based on the RPE. By regression, the findings show that the likelihood of promotion is significantly positively associated with preceding RPE. The promotion incentive with RPE relates positively to the post- firm performance and outperforms other incentives by almost 7% based on three-year post- Tobin’s q. But the relation only persists significantly in the region where the market is less developed and competitive, namely, with the lower number of firms listed in the stock market, less stock market capitalization, or higher regional Herfindahl-Hirschman Index (HHI). These results imply that RPE plays a critical incentive role in a less competitive market environment.