Disproportional ownership structure and pay-performance relationship: evidence from China's listed firms

This paper examines the impact of disproportional ownership structure on the pay-performance relationship in China’s listed firms. We find that the cash flow rights of the ultimate controlling shareholder have a positive effect on this relationship while a divergence between the control rights and cash flow rights has a significantly negative effect. By dividing our sample into state owned enterprises (SOE), state assets management bureaus (SAMB), and privately controlled firms, we find that cash flow rights in SOE controlled firms have a significant impact on accounting based pay performance and cash flow rights in privately controlled firms also affect the market performance based relationship, however, CEO pay in SAMB controlled firms bear no relationship with either accounting or market based performance. We therefore argue that CEO pay is inefficient in firms where the state is the controlling shareholder because it does not maximize shareholder’s market value but is consistent with the efforts of controlling shareholders to maximize their cash flow.