Peer Effects Of China’s A Share Listed Companies’executive Compensation

This paper investigates the influence of peer effect on top executive pay levels of China’s A-share listed company, and explores the motive behind this kind of effect. We use the total compensations of top three executives of all the A-share listed companies at Shenzhen stock exchange and Shanghai stock exchange in2009-2013to measure compensation, found that the top three executives’compensations are more easily to be increased in year t if their compensation levels are lower than the peer group median level in year t-1compared to those above the peer group median level, thus proving the existence of peer effect. Furthermore, in order to determine whether the peer effects are caused by the compensation manipulation of chief executives or out of the need to maintain a competitive compensation levels so as to retain talents, we divide company characteristics into economic motive variables and management power motive variables. Empirical evidence show that economic variables have a significant effect on the likelihood of peer effects, but management power motive variables do not. This result tends to support that the motive behind peer effects comes from competitive benchmarking theory and the hypothesis that top executives manipulate the compensation setting process to driven their compensation levels cannot be established. In the empirical analysis, we also found an interesting phenomenon, that is despite management power variables are less related to peer effect, but the correlation between a management power variable and peer effect has been remarkable. This variable is the company’s property rights, so we further compare the regression coefficient of state-owned enterprises and non-state-owned enterprises and find that state-owned companies are more likely to use peer effects in driving the increase of compensation. This shows that ownership has an important effect in determining whether or not to use peer effects in practice. The contribution of this paper lies in:on one hand, this paper proves that the practice of listed companies anchoring the median pay level in the same industry does drive the rise of executive pay, thus provides an explanation to the rapid increase of China’s top executive compensation in recent years; on the other hand, this paper showed that the likelihood of peer effects is more related to economic motive rather than management powermotive, and we found that the peer effect is also associated with China’s special nature of property rights, which is a beneficial supplement to the peer effect study.