Local Happiness and Executive Compensation

How does happiness—an important nonmonetary benefit—affect executives' monetary compensation? Although previous studies have shown that some nonmonetary benefits—such as living quality, air pollution, and corporate social recognition—significantly affect managerial compensation, little is known about the impact of happiness on executive pay. Using a sample of Chinese companies from the year 2008 to 2021, we analyze happiness data at the city level to explore the relationship between happiness and corporate executive compensation. The results show that local happiness is significantly and negatively related to executive compensation. This finding remains robust when analyzed using alternative measures of variables and different estimation methods and when controlled for endogeneity concerns. We also document that executive needs and talent migration are channels through which happiness affects executive compensation. The additional heterogeneity analyses reveal that the negative relationship between happiness and executive compensation is more pronounced if a firm has strong bargaining power or is not state-owned. The findings in this study highlight the importance of nonmonetary incentives in designing executive compensation packages and motivating executives.

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