1 State-Stewardship Theory and Executive Compensation

We propose a state-stewardship theory competing with the traditional agency theory to explain the corporate governance model and executive compensation policy in China. Under China’s highly politically-oriented institutional environment, Chinese managers (business elites) are not just professional managers but also government officials (political elites) directly appointed – even in ‘private ’ firms – by the state. Consequently, they do not face inherent conflicts of interest with the state, but are expected to act as responsible ‘stewards ’ of the state. This state-steward relationship is amplified when more state-owned shares are sold to the market. We test the state-stewardship theory on all non-financial listed firms in China for the period 2001 to 2011. Consistent with our conjectures, we find that Chinese managers are paid much less than their international counterparts and that remuneration is lower in firms with larger state-ownership or stronger (ultimate) state-control. Also, Chinese managers seem to be remunerated not for maximizing equity value but for increasing the value of the state-owned assets. The board of directors only plays a symbolic role; it does not have much influence in terms of advice or supervision and does not seem to regulate managerial pay. Managerial duality does not seem to grant the general manager more power in influencing his own remuneration. Furthermore, managers ’ remuneration is not linked to competence and personal traits, but rathe