Executive pay restrictions, political promotion, and firm efficiency: Evidence from China

Abstract

Using the mandatory reform in executive pay restrictions within Chinese state-owned enterprises (SOEs) as a quasi-natural experiment, we investigate the effects of compensation incentives and political promotion on firm efficiency. Our difference-in-differences analyses reveal that firm efficiency significantly decreases following the reform, and political promotion can attenuate this negative association. Firm risk-taking is a potential mechanism underlying this observed phenomenon. The negative relationship and mitigation effect are more pronounced for central SOEs and commercial class II SOEs. Furthermore, these findings exhibit variations based on distinctive attributes in compensation structures, CEO characteristics, and political promotion ranks. Overall, our study underscores the complementary roles of explicit and implicit incentives within SOEs, providing a strong rationale for government regulation and reform of executive compensation.