Executive Compensation and Firm Financial Performance in China

Executive compensation has long been seen as the solution key to the agency problem between shareholders and managers in terms of corporate governance. Specifically, an efficient remuneration system could effectively motivate executives and reduce agency costs between shareholders and managers. On the other hand, if the remuneration system is not properly designed, it may lead to a lack of incentive for management, which could exacerbate the dispute between shareholders and management in turn. The topic of "exorbitant remuneration" for senior executives of listed companies has caused great concern in China in recent years. Some have begun to question whether the rise in executive remuneration reflects the increase in wealth creation for the company and if the corporate governance incentive scheme is logical and efficient. China is currently undergoing an economic transition to a more market-based economy. Furthermore, Confucianism, which emphasizes the equal distribution of wealth, has had a significant influence on China. Therefore, it is interesting and important to study the relationship between executive compensation and company financial performance in China. Using quantitative analysis, the first finding is that executive compensation and company financial performance are positively correlated. Second, it shows that the pay gap has a positive impact on company performance which supports the tournament theory. For further analysis, the findings indicate that, in highly competitive industries, there would be a greater correlation between executive compensation and company financial performance; in non-SOEs, there would be a larger correlation between executive compensation and company financial performance; after the introduction of the "2015 wage cap," there would be a decreased correlation between executive compensation and company financial performance. Overall, this dissertation provides information on the effects of compensation and pay inequality with a number of practical implications for remuneration committees, policymakers, managers, and media in China and other countries with comparable cultural and institutional backgrounds. However, more research still needs to be done as there exist some limitations to this dissertation