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e economic inefficiencies that
are detrimental to the firm’s shareholders. Excessive CEO compensations are evidence of poor
governance. Because of the separation of ownership and control, managers have an incentive to
extract private benefits when shareholders’ monitoring is low. Identifying the determinants of
CEO compensation contributes therefore towards exposing the sources of governance imperfections.
Indeed, if excessive CEO compensation is associated with insider-dominated boards, and
not related to performance factors, the policy implication must be to emphasize the role of outside
directors, not only in order to restrain CEO compensation, but more generally to enhance the
firm’s governance structures.
Few studies have analyzed the corporate governance of Chinese firms despite the growing
importance of China as a manufacturing powerhouse. The issue is also significant given the fact
the China has adopted a controlled approach to the restructuring of its economy compared to
the former socialist countries in Eastern Europe. As a result, the transition from a command
economy has proceeded rather smoothly. The evidence produced in this paper indicates that there
have been few abuses in China.18 To the extent that excessive CEO compensation reflects the
quality of corporate governance, there is little indication that CEOs have taken advantage of less
effective governance structures to award themselves higher compensations. Our results are in
contrast to Core et al. (1999) who studied the compensation of U.S. CEOs. In particular, we
show that CEO compensation is uncorrelated with CEO duality and board size. We also find
a positive association between CEO compensation and CEO ownership, as well as a positive
influence of foreign investors on CEO compensation, whereas Core et al. document a negative
association.
The variables concerned can be related to the degree of proximity of the firm with global
executive compensation standards. It is well known that average earnings are extremely low in
China, regardless of the quality or productivity of the workforce. As a result, there happens
to be a huge discrepancy between domestic wages and foreign wages. Business Week (2001)
indicates that CEO compensation in China is only 21 times the average employee compensation,
as compared to 531 times in the U.S. In most Latin–American countries, the ratio is also higher,
between 48 (Argentina) and 57 (Brazil). By being employed in firms whose compensation policies
are closer to foreign standards, CEOs are likely to receive higher compensation levels. Given
the increasing globalization of China’s economy, a convergence towards foreign compensation
levels can be expected (as in Murphy’s (1999) monograph). Rawski (2002) indicates that foreign
businesses have contributed substantially to expanding the scope of market forces in determining
patterns of employment and compensation, especially in large cities and along China’s central
and southern cost. Of particular significance, state enterprises, which were once considered as the
bastions of egalitarianism, have started to recruit professionals at wages close to U.S. standards.19
18 Although the popular press seems to abound with stories of government bureaucrats plundering the assets of the
firms they were in charge of administering. Liu (2005) gives the example of Meierya and Sanjiu Pharma, two