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ompetitive environment, or may be closer to traditional socialist ideal
ideals of equal treatment, and thus more reluctant to provide higher CEO compensation levels.
In a study of CEO pay in Germany, Elston and Goldberg (2003) document that higher economic
integration has also led to substantial pay increases. Indeed, CEOs of German companies making
acquisitions in the U.S. have been confronted with the thorny issue of seeing the head of their
new subsidiaries or local units earn a multiple of their own compensation.17 In essence, economic
integration opens the gates to a convergence in world prices for every production factor including,
in this case, managerial talent. Another related example is the collapse of the USSR in the early
1990s, which triggered an adjustment of the internal price system towards the international price
system (e.g. for commodities).
Overall, our results suggest that CEOs of Chinese firms may expect to benefit much more from
the realignment of China’s internal price (and pay) system than take the opportunity of ineffective
board supervision to extract private gains, including higher pay.
4.2. Influence of ownership structure
Among the variables describing the firm’s ownership structure, CEO shareholding and foreign
B and H shares ownership are statistically significant at the conventional level. State shareholding
also becomes statistically significant in IRLS regressions, which lowers the weights on outliers.
The significant positive coefficient of CEO shareholding suggests that a 0.01% increase in
CEO shares ownership is associated with a RMB 7611.2 pay increase (with Model 3). In view
of the median CEO shareholding (0.008%) and median CEO compensation (RMB 48,000), CEO
shareholding appears to produce only a modest pay difference. Nonetheless, the result is opposite
to the agency theory’s prediction that share ownership contributes to restraining CEOs’ private
gains, in particular a higher compensation, by aligning managers and shareholders’ interests
(Allen, 1981; Lambert et al., 1993; Core et al., 1999). The result is also unlikely to derive from
the entrenchment hypothesis suggested by Morck et al. (1988) given the negligible and rather
recent experience of CEO shareholding in China. A more likely explanation is that CEO stock
compensation is used to attract and retain talented managers who may command high-paid jobs
in foreign-owned companies. In that case, CEO stock compensation is a way of enhancing the
CEO’s total compensation and of reducing the need to pay out higher cash salaries and bonuses.
In support of this view, Tenev and Zhang (2002) document that the Chinese government allocates
shares to the CEO based on his rank in the managerial hierarchy. CEO shareholding thus provides
17 This has been the case at Daimler Benz following its acquisition of Chrysler. Jurgen Schremp, the head of Daimler
Benz, was reportedly paid DEM 3 million, while Robert Eaton, the president of Chrysler, was taking home the equivalent
of DEM 20 million (Elston and Goldberg, 2003).D. Li et al. / Research in International Business and Finance 21 (2007) 32–49 47
5. Conclusion
This paper investigates the relationship between CEO compensation and corporate governance
attributes in China. The agency literature suggests that inadequate governance structures
can distort the incentives of the firm’s management and generat