Doctor of Philosophy
School of Accounting and Finance
Zhu, Yuqing, Ownership structure, board composition, and CEO pay-performance relationship: evidence from China, Doctor of Philosophy thesis, School of Accounting and Finance, University of Wollongong, 2010. http://ro.uow.edu.au/theses/3973
Over the past two decades, the impact of ownership structure and board composition on managerial compensation and corporate performance has been a leading topic in the finance literature. This topic remains relevant today, perhaps even more for emerging economies when economic transformation and growth raise new issues regarding the role of government. Does the government still considerably affect China’s listed firms; are there any predictable effects of ultimate ownership on executive compensation or firms’ economic performance?
First, this study examines the impact that ultimate ownership has on the CEO pay-performance relationship via a sample of China’s listed firms. I used cash flow rights to measure the positive incentive effects whilst excess control, the divergence between control rights and cash flow rights, is used to measure the negative entrenchment effects. I found that the cash flow rights negatively affect CEO pay level and positively affect pay-performance relationship; while the excess control positively affects the level of CEO pay and negatively affects the pay-performance relationship. I also found that higher concentrated state-controlled firms have stronger CEO pay-performance relation than those of lower concentrated state-controlled and non-state controlled firms. My results further indicated that cash flow rights are almost double in state-controlled firms than non state-controlled firms; while the excess control is only one third in statecontrolled than non-state controlled. I then showed that cash flow rights have strong positive impact on pay-performance relationship in both state and non-state controlled firms while excess control only has a negative impact on CEO pay-performance relationship in state-controlled firms. I argue that the net results between cash flow rights and excess control lead to higher CEO pay-performance relationship in state-controlled firms than non state-controlled firms.
Second I examined the effect that independent directors of a board and independent compensation committees have on CEO pay-performance relationship in China’s listed firms. I found that firms with higher proportion of independent board directors have a stronger positive CEO pay-performance relationship and this positive relationship only exists when the firms have a compensation committee. For the sub-sample of firms with a compensation committee, I showed that those firms with higher proportion of independent board director have a stronger pay-performance relationship than those with lower proportion of independent board directors. When any director in the compensation committee is paid, the pay-performance relationship becomes weaker and this negative impact is more evident when the proportion of independent board director is higher. Furthermore, I found that CEO pay-performance relationship and the impact of board independence on this relationship improved dramatically after a compensation committee was formed. My results suggest there is a complementary relationship between board independence and compensation committee/compensation committee independence in enhancing pay-performance relationship because the compensation committee, particularly an independent one, gives information to the directors and helps them design relevant executive pay schemes.
Finally, I examined the impact of ownership structure on earnings management and true firm performance (a firm performance adjusted for the effect of earnings management) of listed firms in China and found that private shareholdings (the percentage of A share) decrease earnings management significantly while state shareholdings increase it. I also found there is a significant inversed U-shaped relationship between the largest shareholdings and earnings management. As a result, private shareholdings substantially increase true firm performance while the state shareholdings decrease true firm performance due to their effects on earnings management. Moreover, in response to the inversed U-shaped relationship between the largest shareholdings and earnings management, the association between the largest shareholdings and true firm performance indicated a U-shaped relation.
Extant literature reveals mixed results on ultimate ownership, board composition and CEO pay-performance relationship, which may be due to omitting key variables in different contexts. This study, however, gives a new perspective to corporate governance concerning ultimate ownership, board composition, and CEO pay-performance relationship in China’s listed firms.