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Corporate Governance or globalization: What determines CEO compensation in China?
School of Banking & Finance, University of New South Wales, NSW 2052, Sydney, AustraliaReceived 1 March 2005; received in revised form 16

Abstract
This paper examines the relationship between corporate governance and CEO compensation in China.In contrast to results derived from U.S. data, we find little evidence that Chinese CEOs take advantage ofweaker board structures or less demanding shareholders to extract higher compensation packages. Instead,our results lend support to the view that the increasingly global managerial labor market and compensation
standards have a greater impact on CEO pay level. Our study suggests that CEOs in developing economieslike China, in our case, benefit more from their degree of exposure to these changes than from corporate
governance imperfections.

Keywords: CEO compensation; Corporate governance; Labor market;Globalization; China

1. Introduction
Over the past two decades, China has experienced a dramatic transformation from a commandeconomy to a society responsive to market forces. Groves et al. (1994, 1995) emphasize thatcorporate reforms initiated in the 1980s have handed plant managers autonomy in decisionmaking,reduced state interference in the production process, and significantly improved themanagerial resource allocation system. Many state-owned enterprises have been transferred tothe private sector, although the state and other government institutions have typically retained∗ Corresponding author.

34 D. Li et al. / Research in International Business and Finance 21 (2007) 32–49indicate that corporate governance falls short of explaining differences in CEO compensation. Incontrast, variables that reflect a closer adherence of the firm to global executive pay standards (inaddition to corporate governance standards) all have significant coefficients. The results suggestthat powerful trends in executive compensation have more impact than corporate governance
differences.Murphy (1999) observes that two forceful transformations are currently under way. The firstis the acceptance of a greater dispersion in workers’ compensation. Hall and Liebman (1998)show that, between 1982 and 1994, the average compensation for U.S. CEOs increased by 175%
in real terms, whereas the average compensation for all U.S. workers barely increased (by only0.6% a year). Conyon et al. (1995) document that CEO compensation in the UK also increasedby 149% between 1980 and 1993. For the larger FTSE 100 companies, the increase is even
more impressive (about 336%). There is no doubt that similar changes are taking place all over
the world and, specifically, in China, given the increasingly global market for managerial talent
(Murphy, 1999; Business Week, 2001). Koen (2004) argues that these adjustments are necessaryfor a country affected by globalization to preserve its core characteristics. The second trendis the higher sensitivity of CEO compensation to firm performance. While Jensen and Murphy(1990) and Rosen (1992) found CEO compensation to be weakly associated with performance andvalue creation, the more comprehensive and recent study of Hall and Liebman (1998) shows thatdifferences in CEO compensation are now essentially generated by stock performance following
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