The Impact Of Government Intervention On Executives’ Pay Performance Sensitivity Of The China’s State-owned Listed Companies

As an important mechanism to improve corporate governance, executive compensationhas been a great concern by the government and academia. Triggered by the U.S. subprimemortgage crisis, corporate performance fallen sharply corresponds to the strong growth ofthe remuneration of its executives in the global financial tsunami. Executive compensationand corporate performance inversion phenomenon has aroused widespread concern of thepublic. Faced with the pressure of public opinion and public skepticism, governments haveintroduced their respective―versions of the salary limit‖. However, the government’sintervention really improves executive pay performance sensitivity in order to makeexecutive pay incentives more effective?In China, strong government intervention has been prevalent in state-owned enterprises(SOEs). As the formal owner, the government intends to interval the SOEs by influencingthe decision-making activities. Executive compensation and firm performance of SOEs aresubject to the government intervention. Based on China’s unique institutional background,this paper studies the impact of government intervention on executives’ pay performancesensitivity of SOEs from the pyramid holding structure perspective. In order to improve theexecutives’ compensation incentive system and to enhance the performance sensitivity ofexecutive compensation of SOEs, this paper provides a theoretical reference and empiricalevidence.Based on the relevant literature and theory, this paper takes theoretical analysis andempirical analysis method to study the topic. Combing the institutional background of China,this paper does an empirical research by building panel data multiple regression models withsamples that China’s state-owned listed companies in China’s A-share market from2004to2009. The study found:(1) The executive compensation and firm performance of China’s state-owned listedcompanies are correlated, but government intervention will significantly affect executive payperformance sensitivity.(2) The nature of the actual controller will affect executive pay performance sensitivity.Relative to a companies controlled by the local government, the executive pay performancesensitivity of the companies controlled by the central government is lower.(3) From the whole sample, the pyramid control chain level and executive payperformance sensitivity presents the inverted U-shaped relationship. Longer control chainlevel weakened government intervention, to enhanced executives’ pay performance sensitivity; however, when the control level is too long, internal control agency problemsweakened the pay performance sensitivity.(4) Number of pyramids control chain and executives’ pay performance sensitivityshowed a significant negative correlation. Number of pyramids control chain weakenedgovernment intervention so as to enhance executives’ pay performance sensitivity.