Management compensation and corporate governance reform in China

Abstract This paper investigates the effect of split-share structure reform on the dynamics between executive compensation and firm performance for Chinese public firms. Using panel data analysis and a dynamic GMM model, it reveals that the split-share structure reform has positive impacts on management compensation and firm performance. The reform results in significant liquidity and control effects on executive compensation shown by increases in market capitalization and decreases in state ownership of the firms. The results generally support the principles of agency theory and confirm the existence of performance-based pay scheme in Chinese public firms. However, evidence also demonstrates that Chinese management compensation practices may emphasize relation-based contracts rather than market-based contracts. This finding implies that government officials or corporate board members may ensure efficient incentives in situations involving weak corporate governance. The findings have important implications for investors, board members, and policy makers who wish to understand the lexicon of political science in emerging markets.