June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Executive Compensation in Emerging Markets: Theoretical Developments and Empirical Evidence Yongli Luo Wayland Baptist University, United States
Abstract This chapter investigates the theoretical frameworks and recent empirical evidence of executive compensation in emerging markets. The author outlines theoretical evolutions and identifies unique aspects of institutional features in determining the pay scheme in emerging markets. Due to family ownership and political influence within state-owned enterprises (SOEs) in emerging economies, the agency-based bargaining takes place in firms with strong governance while entrenchment-based skimming takes place in firms with weak governance, and this could lead to a relation-based rather than a market-based compensation contract. The literature seems to be heading into the direction of considering executive pay as an outcome of pay setting practices, embedded in socially constructed corporate governance arrangements. The author highlights the importance of executive compensation studies in emerging economies and calls for future research by integrating the institutional features of emerging markets into investigations of the various pay practices across different jurisdictions. Keywords: Executive compensation, corporate governance, emerging markets.
1. Introduction Executive compensation has been a major subject of empirical studies in developed countries, such as the United States, United Kingdom, Canada, Japan, and Germany (Barkema and Gomez-Mejia, 1998). However, it is important to examine the determinants of chief executive officer (CEO) compensation in emerging markets. Due to the difference in firm structure, market features, and organizational institutions, the mainstream compensation studies in developed countries may not apply to emerging markets. Particularly, Anglo-Saxon corporate governance means 499
3rd Reading
June 26, 2014
15:35
500
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
shareholders control senior managers. It features open, external information disclosure and stringent accounting rules, dispersed ownership structure, single-tier boards, hostile takeovers, laws protecting minority shareholders, and a high proportion of a firm’s stock in “free-float.” As a result, advisory vote on executive compensation is non-binding in most AngloSaxon countries, in other words, a majority of shareholders cannot reject a new remuneration policy. On the contrary, in emerging countries, corporate governance features on the stakeholder model (or Rhineland model) which has a two-tier board structure where both the management board and the supervisory board have overall responsibility for weighing up the interests of stakeholders. Moreover, the ownership structure of the firms in emerging countries is not as dispersed as that of Anglo-Saxon companies. As a result, there is a natural distance between executive board members and non-executive board members and the executive remuneration plans are associated with the shareholders’ binding vote under the “Say-on-Pay” regime (Knop and Mertens, 2010). Academics cast doubts on the effectiveness of commonly used agencybased corporate governance mechanisms in developed economies, and they argue that they may not work in emerging economies (Ball et al., 2000). The stylized fact in emerging markets is that managerial markets are not well developed, as the families of founders and state governments often intervene. CEOs are often selected from the relatives of the founder or appointed by the government, and there is a common fear that they build up their wealth at the cost of shareholders (Ghosh, 2006). Moreover, there is no clear distinction between ownership and control in emerging economies (Luo and Jackson, 2012). Corporate laws, such as codes of corporate governance, listing agreements, and bankruptcy laws, are also very weak. Moreover, accounting practices are not up to international standards, and there is no uniformity in accounting across firms. Therefore, it is argued that the AngloSaxon context is not an ideal setting to test the effectiveness of corporate governance in firm value because the quality of corporate governance in these countries is quite high, while in a country where legal and cultural constraints on corporate behavior are weak, corporate governance has a powerful effect on firm value (Black, 2001). The goal of this research is to identify some of the key determinants and the unique aspects of executive compensation in emerging markets
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
501
and provide further advancement in this line of research. Specifically, I conduct a systematic comparison and comprehensive review of the literature and practices on executive compensation in emerging economies by addressing the following key questions: (1) How do executive pay criteria and corporate institutions differ across different emerging countries? (2) How to apply generalized theory and justify the empirical findings based on existing theory by integrating other paradigms? (3) How does compensation research among emerging countries contribute to the understanding of global compensation practice? This chapter contributes to the literature by discussing the theoretical evolutions, the particular characteristics of corporate governance and the determinants of executive compensation in emerging countries in terms of pay-for-performance sensitivity (PPS), contingency factors, corporate diversification and CEO incentives. This chapter identifies several critical issues and key elements in determining the pay scheme in emerging markets, such as the criteria used in determining executive compensation, the influence of contingency factors, governance mechanisms on executive compensation, the forms of pay consequence, and executive compensation’s implications for subsequent firm performance. Due to the family ownership and political influence within state-owned enterprises (SOEs) in emerging economies, the agency-based bargaining takes place in firms with strong governance while entrenchmentbased skimming takes place in firms with weak governance (Bertrand and Mullainathan, 2001), and this could lead to a relation-based rather than a market-based compensation contract (Ball et al. 2000). I thereby highlight the unique contributions of executive compensation studies in emerging economies and call for future research by integrating the unique aspects of institutional features into investigations of the pay variances across different jurisdictions around the world. The rest of the chapter is organized as follows: Section 2 reviews agency theory, principal–agent conflicts and executive compensation. Section 3 discusses entrenchment theory, principal–principal conflicts and executive compensation. Section 4 summarizes the theoretical frameworks. Section 5 provides an overview of empirical studies and recent developments in executive compensation in several emerging economies. Section 6 concludes with suggestions for future research.
3rd Reading
June 26, 2014
15:35
502
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
2. Agency Theory and Executive Compensation 2.1 Agency theory and pay-for-performance sensitivity Agency theory states that management compensation arises from the separation of ownership and control, implying that a firm is “a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent (Jensen and Meckling, 1976).” Since both parties act to maximize their own utilities, the principal’s interests conflict the agent’s benefits. To align the interests of the managers with those of the owners, it is important for owners to establish incentive contracts for the managers and effective monitoring mechanisms within the firm. In other words, executive compensation contract is determined by arms-length bargaining that leads to efficient outcomes (Edmans and Gabaix, 2009). According to agency theory, executive compensation depends, at least in part, on changes in shareholder’s wealth. A positive relationship between management compensation and firm performance is in line with shareholders’ wealth because the higher the pay-for-performance responsiveness, the lower the level of “skimming.” The implication is that an optimal managerial compensation contract within a firm is beneficial to shareholders’ wealth and effective in alleviating agency problems (Morck et al., 1988). Thus, an optimal compensation contract could serve as a means of providing proper incentives for executives. “Agency theory predicts that compensation policy will tie the agent’s expected utility to the principal’s objective. The objective of shareholders is to maximize wealth; therefore agency theory predicts that CEO compensation policies will depend on changes in shareholder wealth.” —Jensen and Murphy (1990: 242–243)
Early empirical studies generally support a positive PPS. For example, Jensen and Murphy (1990) find that the association between firm performance and CEO compensation is significant; on average, every US$1,000 change in shareholder’s wealth leads to 2 cents of change in CEO’s incentive pay. Kaplan (1994) checks for different measures of firm performance, including earnings, stock returns and sales, to test the pay-performance setting, and illustrates that CEOs’ cash compensation is an increasing function
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
503
of firm performance. Nonetheless, a significant number of scholars find that earlier studies are not persuasive. By using different data, techniques, and model specifications, they generally find little evidence or only very weak proofs to support the pay-for-performance setting (Jensen and Murphy, 1990). For example, Morck et al. (1988) point out that CEOs’ cash compensation is not an increasing function of firm performance, the relationship between managers’ ownership and firm value is non-linear. In general, the only variable that has been found to have a consistently positive relationship with CEO compensation is firm size. Therefore, the overall explanatory power of the empirical model for PPS is quite low and this remains a puzzle in the analysis of executive compensation. The debate on the determinants of executive pay levels and structures is still ongoing. Although many evolving theories are used to explain executive compensation, the field is still dominated by the perfect contracting approach of agency theory as introduced by Jensen and Meckling (1976). The agency theory on executive pay holds that executive pay is an instrument to alleviate agency problems. To render the separation between firm ownership and firm control harmless, researchers find that agency theory has greater generalizability due to its abstraction from context (GomezMejia et al., 2005). The widespread story told is that executive pay is an instrument to align the interests between shareholders and management (Bebchuk and Fried, 2004). However, the 2008 subprime episode has raised severe criticism of the pay practices in the US and Europe regarding corporate governance on executive compensation. Particularly, CEO compensation was turned attention toward the compensation excesses to the US executives, including bank executives. A survey conducted by The Financial Times shows that more than half of the US executives reported that they were overpaid (14 October, 2007). The public debate and government bailout give the impression that the boards of directors have made a bad job of defining the CEO incentives or compensation package. Moreover, as a major explanation for executive compensation, agency theory has been challenged by the dysfunctional Wall Street practices as reported by The Wall Street Journal (30 November, 2009). This debate calls for more indigenous research contributing to the existing knowledge by delineating theoretical boundaries and empirical practices in executive compensation.
3rd Reading
June 26, 2014
15:35
504
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
2.2 Agency theory, corporate governance and executive compensation Jensen and Murphy (1990) suggest that researchers should examine some other factors outside an agency framework to explain CEO compensation, or at least empirically test the explanatory power of other alternative paradigms to agency-based models. Barkema and Gomez-Mejia (1998) conduct a more comprehensive investigation of related theories including marginal productivity theory, information-processing theory, managerial discretion theory, and social comparison theory, etc. Thus, corporate governance comes into play in executive compensation studies. Corporate governance is a set of processes and conventions that govern the way how a corporation is directed, administered or controlled. Good corporate governance system requires certain mechanisms in the process of improving firm performance and monitoring management incentives. Such schemes include the presence of independent directors or remuneration committees on the board, separation of responsibilities between the board director and the CEO, etc. Meanwhile, corporate governance also calls for transparent information disclosure, effective corporation takeover market as well as stringent legislative regulations. The particular corporate governance environment around the world provides additional insights into the understanding of executive pay practices under different corporate systems. Table 1 reports the executive–worker pay gap ratio for various countries as reported by the Towers-Perrin, a consultancy firm in year 2001. It shows that there is a clear difference in pay gap for firms in emerging markets relative to those firms in developed countries. The ratio of average executive compensation to the average wage of a manufacturing worker (referred to as the executive–worker pay gap) is about 23 times in the Philippines, and 57 times in Brazil, while the executive–worker pay gaps are much smaller in developed economies, for example, the ratio is 10 in Japan, 11 in Germany, and 16 in France. Empirically, a growing body of literature supports that executive compensation is associated with a firm’s ownership structure, board characteristics, remuneration committee, the market for corporate takeover, and even the general public environment (Jensen and Murphy, 1990), although efforts to find a solid correlation between a firm’s governance attributes and its value in the Anglo-Saxon context mostly show weak or no results. Since
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
505
Table 1. The Executive–Worker Pay Gap across Developed and Emerging Countries. Emerging Countries Country Brazil Venezuela South Africa Argentina Malaysia Mexico Thailand Philippines China Taiwan South Korea
Pay Gap 57 54 51 48 47 45 23 23 21 15 11
Developed Countries Country Hong Kong Singapore United Kingdom Australia Netherlands Canada Belgium Italy Spain New Zealand France Sweden Germany Switzerland Japan
Pay Gap 38 37 25 22 22 21 19 19 18 16 16 14 11 11 10
Notes: The executive–worker pay gap is the ratio of CEO compensation to average employee compensation. The data are based on Unite et al. (2008) and the estimates by the TowersPerrin, a consulting firm from Worldwide Total Remuneration 1999–2000, where average employees were assumed to be working in industrial companies with about $500 million in annual sales (BusinessWeek Online, 18 April, 2001).
the evolution of agency problem is dealing with the contractual arrangements among factors of production, an ideal corporate governance mechanism is not achieved unless there is a “complete contract” between the principals and the agents which foresees every single future contingency and specifies corresponding actions (Shleifer and Vishny, 1997). Accordingly, various researchers have extensively investigated different aspects of corporate governance mechanisms, including board independence, board size, board meeting frequency and the overall board control level; they confirm that such factors have significant influence on firm performance and executive compensations. Therefore, integration of corporate governance into the determinants studies of executive compensation in emerging markets has become prevailing in recent years.
3rd Reading
June 26, 2014
15:35
506
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
2.3 Agency theory and executive compensation studies in emerging markets Academics cast doubts on the effectiveness of commonly used marketbased corporate governance mechanisms in developed economies, and they argue that they may not work in emerging economies (Ball et al., 2000). One of the reasons is that the Anglo-Saxon context is not an ideal setting to test the effectiveness of corporate governance in firm value because the quality of corporate governance in these countries is quite high; while in a country where legal and cultural constraints on corporate behavior are weak, corporate governance has a powerful effect on market value (Black, 2001). Another reason relies on the fact that the political influence within SOEs in emerging economies. In fact, studies in emerging markets provide more striking evidence on the effect of ownership structure on CEO compensation. Lazarides et al. (2008) conduct a study in Greece, a country without Anglo-Saxon characteristics, and confirm that the level of executive remuneration is positively associated with financial performance and negatively associated with corporate governance mechanisms. Parthasarathy et al. (2006) use a more comprehensive dataset of Indian firms and find that CEOs who are promoters or owners receive compensation higher and with a greater incentive component. Suherman et al. (2011) examine the Indonesian financial firms over 2007–2009 and find that high executive compensation does not necessarily solve the agency problem, while outside directors and institutional ownership significantly affect executive compensation. By theory, the executive pay literature reveals at least three major implications for our understanding of executive pay practices and future theoretical developments: (1) Executive pay is not merely a “tool” to align interests between shareholders and executives, but is much more an outcome of pay setting practices; (2) the actors involved in these pay setting practices have considerable discretion not only to influence their own pay or the pay of others, but also have discretion to influence the development and workings of the mechanisms of these practices; and (3) pay setting practices cannot be fully understood without a thorough understanding of the implications of socially constructed corporate governance arrangements. Therefore, the unique aspects of institutional features in emerging markets would provide a fruitful resource of executive compensation studies (Otten, 2008).
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
507
3. Entrenchment Theory and Executive Compensation 3.1 Managerial power and principal–principal conflicts Faccio et al. (2001) and Young et al. (2008) argue that a principal–agent perspective may have limited application in emerging economies, because most corporations in these countries are controlled by a family or the state with concentrated ownership. As a result, there is more potential for conflict between majority shareholders (principals) and minority shareholders (principals) than there is between shareholders (principals) and managers (agents). They term this type of corporate governance problem as the “principal–principal” (PP) problem, and draw on institutional theory, which focuses on the formal and informal constraints giving rise to its underlying root causes. Overall, they suggest that a PP perspective is more effective because prescriptions derived from the standard principal–agent model may be ineffective or may even exacerbate governance problems in these settings in emerging economies. The entrenchment theory raised from PP conflict assumes that selfinterested executives can extract rents for themselves by manipulating board structures to design favorable compensation packages, subject mainly to an “outrage” constraint applied by the press and other media (Bebchuk and Fried, 2004). The “managerial power” or “rent extraction” theory claims that executives, and particularly CEOs, enjoy positions of power in relation to the design of pay packages, being able to insulate themselves from constraints applied by regulators and shareholders. From this rent-extraction perspective, agency theory is said to be “under-socialized” and ignores social forces in favor of supposed arm’s length contracting (Aguilera and Jackson, 2003). In other words, the CEO’s compensation arrangements have less to do with incentive alignment and more to do with CEO self-enrichment or “skimming” (Bertrand and Mullainathan, 2001). In a country where the governance system is weak, the agency problem between the large shareholders and the minority shareholders is astonishingly significant. In contrast to agency theory dealing with principal–agency conflicts, entrenchment theory mainly deals with the conflicts between controlling shareholders and minority shareholders in a company, which is also called PP conflicts. Broadly speaking, PP conflicts can be achieved by making inefficient investment, resulting in lower firm valuations and lower or higher levels of dividend payouts (Faccio et al., 2001; Young, et al., 2008).
3rd Reading
June 26, 2014
15:35
508
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
Moreover, large shareholders may employ their voting rights to control the company and divert for their own interests while other dispersed shareholders and stakeholders bear the cost (Johnson et al., 2000).
3.2 Expropriation, CEO entrenchment and managerial compensation Under an environment where the corporate governance system is poor, controlling shareholders may expropriate minority shareholders in many ways. For example, the controlling shareholder may pay out special dividends only to themselves instead of “pro-rata distribution”, or they can build up business relationships with the firms they personally control, and sell the company’s output to the solely owned firms at prices that well below market (Shleifer and Vishny, 1997). By considering both the controlling shareholders and the managers as “the insiders” and the minority shareholders as outsiders, La Porta et al. (2000) claim that, no matter who the insiders are, as long as they have enough power to control the firm, outsiders are always the one being expropriated. Shleifer and Vishny (1997) compare the corporate governance systems in most of the developed countries and highlight that large investors and legal protection are indispensable and complementary elements in a successful corporate governance system. On the contrary, in most emerging countries, such as Russia, India, China or Latin America where the investors are not well protected, the managerial expropriation can take direct ways such as cashing out or transfer pricing; whereas in countries with more stringent legislative system for investor protection, managerial expropriation can be achieved through other indirect ways, such as possessing the firm’s funds as their personal perquisites, or the managers may “expand the firm beyond what is rational, reinvesting the free cash, pursuing pet projects, and so on (Shleifer and Vishny, 1997).” In addition, expropriation of minority may be utilized as an instrument for the managers themselves to ensure their job positions at an appealing level of compensation, even when they are not qualified or suitable for the job anymore (Morck et al. 1988). For example, Cheung et al. (2005) find that managers may set a higher level of compensation for their own. Also, there is evidence that controlling shareholders appoint managers with whom they trust (Su et al., 2010)
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
509
Therefore, to avoid the CEO or large shareholders to be powerful enough to set his own compensation and extract rents from the firm, the constraints such as corporate governance and legislative regulations should be added as a key element to test the effectiveness of agency-based PPS setting in emerging markets Since the managers intend to maximize their personal utility instead of the owners’ best interest, a reduction in the owners’ welfare occurs. Although according to agency theory, the firm owners have the residual rights to make decisions whenever the circumstances are not foreseen by the contract; it is not possible for the owners to do so for the reason of lacking qualification and enough information (Shleifer and Vishny, 1997). Under such circumstances, most of the residual rights are actually held by the managers and this results in their use of power to allocate resources according to their own will. Moreover, the controlling shareholders have enough voting power to influence the decisions made by the firm. Within the process of using these control rights, the controlling shareholder may, divert his own benefits from the company and try to maximize their own welfare at the expense of the minority shareholders. Meanwhile, because of the self-interest maximization, managers will take the opportunities to expropriate investors in various direct or indirect forms.
4. Summary of the Theoretical Frameworks Otten (2007) extends previous literature reviews of Gomez-Mejia (1994) and categorizes the existing compensation theories into three approaches in Table 2. The classification is based on the underlying legitimizing arguments or mechanisms of pay within a given theory. The three approaches are labeled respectively as: (1) The value approach, which focuses mainly on the question how much to pay executives. Executive pay is legitimized by arguing that pay is set by market forces and pay is mainly regarded as the market value of executive services; (2) the agency approach, which considers executive compensation as a consequence of agency problems, and focuses on the question such as how to pay executives. Legitimizations of pay levels and structures are based on arguments of market forces and conceptions of executive pay at risk; and (3) the symbolic approach, which considers pay as a reflection of expectations, status, dignity or achievements. Table 2
3rd Reading
June 26, 2014
15:35
510
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility Table 2.
Approach Value Approach
Executive Compensation and Theoretical Frameworks. Theory Marginal Productivity Theory Efficiency Wage Theory
Human Capital Theory Opportunity Cost Theory Superstar Theory Agency Approach
Complete Contract Theory
Prospect Theory Managerial Theory Class Hegemony Theory Symbolic Approach
Tournament Theory
Figurehead Theory Stewardship Theory Crowding-out Theory Socially Enacted Proportionality Theory
Social Comparison Theory Implicit/Psychological Contract Theory
Description Value of input equal to marginal revenue productivity; equal to equilibrium on market Idem Marginal Productivity plus incentive to increase productivity and reduce turnover Value of capabilities and skills on the market The opportunity cost of next best alternative for the executive Disproportionate pay for imperfect substitution Overcome incentive misalignment; based on risk preferences Incentive alignment caused by loss aversion preferences Exhibit of power when negotiating contract Use of power and protection of managerial class Highest price in a contest, motivation for lower level employees Token of executive’s mandate and as accomplishment Secondary, intrinsic motivation is of more importance Part of extrinsic motivation Result of socially normative proportion differences of socially enacted hierarchical levels Based on pay of comparable executives. Likely above going rate of benchmark Symbol of appreciation, accomplishment and dignity
Notes: For details about theoretical classification and data source, see Otten (2008).
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
511
Executive Compensation
Economic
Sociological
Agency theory Tournament theory Information processing theory
Figure 1.
Stewardship theory Social network approach Managerical power
Institutional
Formal institutions Informal institutions
Executive compensation and major perspectives.
provides an overview of current compensation theories and the three major streams of research with detailed descriptions. Sun et al. (2010) also examine a multitude of theories that have been applied to executive compensation. They point out that there exist three major perspectives: economic, sociologic, and institutional perspectives. As shown in Figure 1, a representative economic perspective in executive compensation is agency theory, which argues that the separation of ownership and control in modern corporations demands close monitoring of managers’ behavior by principals to protect shareholders’ benefits. Executive pay is an instrument to align interests between shareholders and executives. Managers have the opportunity and incentives to act in their own interests at the expense of shareholders, giving rise to agency problems (Jensen and Meckling, 1976). The sociological perspective theory assumes that managers do not always act in self-interested ways and in a situation of interest conflict they often place the interests of their firms above their own interests (Zajac and Westphal, 2004). For example, this perspective claims that managers are essentially trustworthy individuals and therefore good stewards of the resources entrusted to them. The third one is managerial power approach; it posits that powerful executives can influence the compensation decisions made by the board of directors or the compensation committee (Finkelstein and Hambrick, 1989), rendering the boards ineffective in setting appropriate CEO compensation contracts.
3rd Reading
June 26, 2014
15:35
512
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
5. Empirical Studies on Executive Compensation in Emerging Markets 5.1 Executive compensation in China China, as one of the largest emerging economies, has been well documented as having distinctive corporate governance and institutional features in many ways. First, Chinese firms typically have a two-tier board structure where a listed firm is governed by both a board of directors and a supervisory committee. Second, the majority of Chinese listed companies are SOEs and their major corporate decisions are frequently exercised by the government. Especially, Chinese executives and directors are often bureaucrats and appointed or nominated by the government. Third, high concentration of ownership is prevalent among Chinese public firms. On average, the equity ownership held by the largest shareholder of a firm is more than 40% (Allen et al., 2005). The concentrated ownership structure implies that the classical principal–agent conflict is likely to be of less concern because controlling shareholders have incentives to monitor managers. Firth et al. (2006a) demonstrate that the pay–performance relationship in Chinese publicly listed companies is significantly affected by different types of controlling shareholders. They find that pay sensitivities to performance are small and insignificant; an additional $1,000 of shareholder value is associated with only 2.1 cents of additional executive pay. However, an optimal CEO compensation contract is critical to the success of economic reform in China and the type of ownership matters. In some Chinese SOEs, executive performance evaluation and promotion decision are based mainly on whether the managers can satisfy and act in the interest of the Chinese Communist Party and the state government (Firth et al., 2006a). Although cash incentive pay for top management is also used, political advancement is sometimes the main motivator (Kato and Long, 2006b). The estimates of median executive performance pay sensitivities and elasticities for Chinese firms are quite different for those firms in the U.S and Korea. As shown in Table 3, both Firth et al. (2006a, 2007) and Kato and Long (2006b) conduct studies based on agency theory to test the PPS for Chinese CEO compensation, the former shows that the PPS is 0.021 and the latter indicates that an additional $1,000 of shareholder value is associated with 5.3 cents of additional executive compensation. Instead of testing PPS, Buck et al. (2008) examine the causal relationship between executive
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo Table 3.
513
Estimates of Median Executive Performance Pay Sensitivities and Elasticities.
Researcher(s) (date) Hall and Liebman (1998) Benito and Conyon (1999) Kato et al. (2006) Firth et al. (2006a) Kato and Long (2006b) Buck et al. (2008)
Country (sample period) USA (1980–1994) USA (1990–1996) Korea (1998–2001) China (1998–2000) China (1998–2002) China (2000–2003)
Performance-pay Sensitivity
Performance-pay Elasticity 0.220∗∗∗ 0.260∗∗∗ 0.194∗∗∗
0.021 0.053∗∗∗ 0.027∗∗∗
0.369∗∗∗ 0.250∗∗
Notes: Performance-pay sensitivity shows the absolute increment to pay associated with a 1,000 unit increase in shareholder value: so a sensitivity of 0.053 (for China) indicates that an additional $1,000 of shareholder value is associated with 5.3 cents of additional executive pay. It is calculated by regressing changes in executive pay on changes in shareholder value. Performance-pay elasticity shows the percentage responsiveness of pay to a percentage change in performance. For example, an elasticity of 0.10 denotes that a CEO associated with a 20% rate of return would be paid 1% more than a CEO associated with 10%. It is calculated by regressing the change in the log of executive pay on change in the log of shareholder value. For more details about estimating methods and data source, see Buck et al. (2008). *** and ** represent significance at the 1% and 5% levels, respectively.
compensation and firm performance for Chinese firms over 2000–2003 and conclude that executive compensation and firm performance mutually affect through both reward and motivation. Buck et al.’s (2008) study reveals that prior studies neglect the severe endogeneity problem between executive compensation and firm performance. More recently, using a sample from Chinese listed companies between 1999 and 2004, Adithipyangkul et al. (2009) examine the financial determinants of CEO perks and the relative contribution of perks to performance. They find that executive perks in China are positively associated with current and future return on assets. In addition, perks are also influenced by firm size, growth opportunity, and leverage, suggesting that perk compensation in China may perform an incentive role to motivate managerial performance. Conyon and He (2011) examine whether the economic forces of executive compensation in the US (such as firm size and performance) are also in operation in China. Using data on public firms over 2000–2010, they show that Chinese CEO compensation is positively related to both stock market and accounting performance. CEO pay is mainly from salaries and bonuses, and it is higher in firms with more growth opportunities,
3rd Reading
June 26, 2014
15:35
514
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
compensation committees, and combined CEO and chair. The authors highlight the substantial changes in Chinese corporate governance over the past decade. “The Chinese State is less likely to be the ultimate owner of public firms. Ownership concentration has declined, and internal firm governance has improved significantly as evidenced by a greater fraction of outsiders on the board and the adoption of compensation committees.” Given that the split-share reform has significant impacts on ownership structure and market liquidity for Chinese public firms, Luo and Jackson (2012) use a large dataset over 2001–2011 and confirmed that the institutional changes and regulatory framework have great impacts on Chinese CEO compensation in the Chinese financial corporations.
5.2 Executive compensation in India In India, a large number of board members are related to the founder of the firm and most firms are family-owned. For example, Sen and Sarkar (1996) examine the intra- and inter-firm differences in managerial characteristics (such as age, experience, qualification and remuneration) for large Indian firms. The evidence suggests the existence of a tournament structure (increasing pay differentials in hierarchies) of salaries and an increase in mean age as one graduate upwards along the hierarchy. In addition, both Ghosh (2006) and Parthasarathy et al. (2006) examine the pay practice in India and provide more details. Ghosh (2006) uses cross-sectional data for 462 firms over 1997–2002 in the Indian manufacturing sector. The author examines the effects of possible factors that determine board and CEO compensation in India by classifying them into four categories: firm performance, internal monitoring, firm diversification, and other firm-specific economic factors. Ghosh (2006) finds that when the CEO is related to the founder, or if there is more than one CEO, board compensation also increases, as it does with an increased firm diversification index. Among the personal attributes of the CEO, only in-firm experience has significant influence on CEO compensation. The study provides evidence that CEO compensation is positively affected by current year firm performance, and CEO age, experience, and education are all important factors in determining CEO compensation in India.
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
515
Parthasarathy et al. (2006), on the other hand, utilize a more recent cross-sectional dataset and examine the effect of corporate governance and firm performance on CEO compensation; they find that CEOs who are also served as promoters (owners) receive higher pay. They also find that none of the profitability measures (net profit margin or return on asset) is a significant determinant of total CEO. However, Ghosh (2010) demonstrates that PPS estimates in India are significant with positive signs as predicted by agency theory, which supports the Jensen and Murphy’s (1990) proposition that there exists a relationship between variance in firm returns and the sensitivity of executive pay to firm performance. 5.3 Executive compensation in Korea Kato et al. (2006) provide the first rigorous econometric estimates on the pay-for-performance relations for executives of Korean firms with and without Chaebol affiliation. Using new panel data for 246 publicly-traded firms in Korea from 1998 to 2001, they find that cash compensation of Korean executives is significantly related to stock market performance and that the magnitude of the PPS is comparable to that of the US and Japan. The results are contrary to a popular belief that Korean corporate governance and the structure of Korean executive compensation is considerably different from elsewhere in the West. They claim that such overall significant executive pay–performance link is driven by non-Chaebol firms and that no such link exists for Chaebol firms and they provide evidence that non-Chaebol firms structure their executive compensation so as to reward their executives more for improving shareholders’ wealth. The evidence is consistent with the recent literature on the nature of Chaebols in Korea and the current corporate governance reform efforts in Korea that are aimed mostly at Chaebol firms. 5.4 Executive compensation in Philippines Unite et al. (2008) provide the first systematic evidence on the nature of the relation between executive compensation and firm performance in the Philippines. They find a positive relation between executive compensation and performance in the Philippines for those firms not affiliated to a corporate group, but not for affiliated firms. They concluded that the substantial
3rd Reading
June 26, 2014
15:35
516
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
portion of the Philippine economy is under the control of group networks, which incentivize managers in different ways other than through use of pay–performance schemes. The findings suggest that it may be more common to have independent, professional managers who are unrelated to the controlling family in the Philippines. While corporate groups in both Korea and the Philippines are familycontrolled, there appears to be a greater separation between management and the controlling family in the Philippines. A major difference between family ownership of corporate assets in Korea and the Philippines is the degree of concentration of ownership. The top 15 families in Korea own 38.4% of listed corporate assets, while the higher concentration in the Philippines is demonstrated in the top 15 families owning 55.1% of corporate assets (Choi and Cowing, 1999). Claessens et al. (2000) report that the CEO, board chairman, or vice-chairman are from the controlling family in 80.7% of firms in Korea, but only in 42.3% of firms in the Philippines. As a support, Salda´na (2001) finds that in a survey of Philippine firms the chairman of the board and CEO are typically not the same person nor related. Consequently, group firms in the Philippines may be more inclined to use CEO compensation to align managers’ interests with their own. Differences also exist between Korea and the Philippines in the ownership structure of firms. Salda´na (2001) contends that Philippine managers have insignificant ownership positions because family-owners opt not to diminish their own ownership strength. In contrast, 38.0% of Korean firms have large management blockholdings. Therefore, linking pay to performance may be more commonly used as an alignment mechanism in the Philippines (Unite et al., 2008). 5.5 Executive compensation in Latin America Gallego and Larrain (2012) use a novel database for three Latin American emerging markets: Argentina, Brazil, and Chile. In these countries, ownership is highly concentrated and weak corporate governance is prevalent. They examine the large shareholders in Latin American firms and their relationship with professional managers with an attempt to understand the wage inequality and returns to high-level human capital. They find a compensation premium of about 30 log points for professional (not controller-related) CEOs working in firms controlled by a family compared to firms controlled
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
517
by other large shareholders. The premium cannot be wiped away by standard firm characteristics, observable executive skills (e.g., education or tenure), or the compensation of the CEOs’ previous jobs. The premium comes mostly from family firms with absent founders and especially, when the owner’ sons are involved. 5.6 Executive compensation in Bangladesh Houqe (2011) explores how the executive compensation practices adopted by the Bangladeshi companies affect corporate performance. The author argued that executive compensation practices should influence the motivational level of the employees and hence affect the organizational performance. The study is conducted on 56 employees of different private organizations in Bangladesh through a structured questionnaire survey. The survey shows that out of four different executive compensation plans only special amenities, such as signing bonuses, extra vacation time, special work space, and company sponsored club memberships influences the overall organization performance. The result can help human resource managers in Bangladesh in designing the executive compensation system for their own organizations. 5.7 Executive compensation in Malaysia Chu and Song (2012) use a dataset of 196 Malaysian public firms. They investigate the interrelationship between executive compensation, earnings management and overinvestment. They find a positive relationship between executive compensation and overinvestment. Specifically, for each percent of overinvestment, 1% increase in share prices increases 23% of executive directors’ equity value, and 1% increase in overinvestment explains 12% of earnings management. The results support that there is a positive relationship between earnings management and overinvestment for Malaysian public firms. 6. Conclusions and Future Developments This chapter investigates the theoretical frameworks and empirical evidence of executive compensation in emerging markets. Through a comprehensive review and comparison study of extant compensation literature, I outline the theoretical evolutions in compensation studies and identify several
3rd Reading
June 26, 2014
15:35
518
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
unique aspects of institutional features in determining the pay scheme in emerging markets. In general, as shown in the appendix, these key elements in determining executive compensation in emerging firms include the criteria used in determining executive compensation, the influence of contingency factors, governance mechanisms on executive compensation, the forms of pay consequence, and executive compensation’s implications for subsequent firm performance. This chapter concludes that the field of executive compensation studies in emerging markets seems to rely on considering executive pay to be an outcome of pay setting practices. The pay processes, pay levels and pay structures can differ from firm to firm and vary across different countries. Therefore, emerging markets present a multitude of opportunities for future compensation research. While agency theory and the institution-based view have inspired debates on the determinants of executive compensation, it is important to undertake a joint consideration of insights from each perspective and situate agency theory constructs in a larger institutional context (Gomez-Mejia et al., 2005). The findings generally support that agency-based bargaining takes place in firms with strong governance while entrenchment-based skimming takes place in firms with weak governance, and the family ownership and political influence within SOEs in emerging economies could lead to a relation-based rather than a market-based contract. The author thereby highlights the importance of executive compensation studies in emerging economies and call for future research by integrating the unique institutional features of emerging markets into investigations of the various pay practices across different jurisdictions around the world. The common belief is that most institutions are able to influence and being influenced by decisions on executive pay, while a more conclusive explanation of executive pay is that social configurations of tangible and intangible institutions jointly determine the corporate governance arrangements in which executive pay setting practices play a central role (Otten, 2007). Such an institutional approach enables to incorporate socially constructed corporate governance arrangements into accounts of executive pay practices. It captures the apparent consensus in the literature that executive pay is an outcome of institutionally evolved corporate governance arrangements, rather than a tool within these arrangements.
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
519
Although agency theory and perfect contracting approach are still dominating executive compensation studies, the executive pay literature seems to be heading into the direction of considering executive pay as an outcome of pay setting practices, embedded in socially constructed corporate governance arrangements over which the actors involved can influence their institutionally constructed discretion (Otten, 2007). The corporate governance arrangement around the world has its particular practices and unique perspectives in each country, given the different demands of local stakeholders and the varieties of social and economic development (Young et al., 2008). The incentive mechanisms for directors and executives in different emerging countries provide a fruitful resource for testing the generalizability of agency theory and offering an opportunity for integrating agency theory with an institution-based view (Sun et al., 2010). From this perspective, it is worthwhile to explore the following directions in executive compensation across various institutions. First, many companies in emerging markets are controlled by SOEs or owned by families, facing problems such as deficient information disclosures and flawed regulatory institutions. It will be interesting to explore the effects of institutional voids when it comes to the designing of an optimal compensation contract. Institutional voids discourage the principal from hiring professionals and capable agents for executive management positions because of the lack of institutional norms and regulations for monitoring contracts, enforcing contracts, and property rights (Khanna and Palepu, 2000). Second, most emerging countries such as China, India and Indonesia are still in the transit process of market-based reform. The reform leads to institutional changes in redesigning the roles, relationships, and governance structures that bring participants together in productive endeavors (Carney et al., 2009). Given the weak legal investor protection and unfledged capital market in these transition economies, agency theory may not be applicable to firms facing such dramatic changes under institutional transition and discontinuous environment shifts. Hence, much efforts and research on executive compensation should be undertaken to meet the demands of institutional changes. Third, researchers should pay greater attention to model specifications, econometric analysis and methodology issues. For example, Firth et al.
3rd Reading
June 26, 2014
15:35
520
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
(2006a) point out that the ownership governance has a self-selected effect on the relationship between executive compensation and firm performance; moreover, there are causal effects between firm performance and managerial ownership levels because it assumes that managerial ownership levels are exogenous, and are the only component of managerial compensation related to firm performance (Palia, 2001). Thus, many efforts should be put to address the self-selection and endogeneity issues in compensation studies. Finally, researchers should pay greater attention to the social influence on executive compensation in emerging markets. For example, Christianity has a spiritual foundation regarding people as stewards of the world owning ultimate responsibility for their behavior to God. Confucius suggests that “in serving one’s prince, one should be intent upon the task, not bent upon the pay.” Therefore, the motivations for people to pursue a job of chief executive officers might be something else instead of remuneration, for example, the prestige of the position, the pleasure of managing an organization, and the chance to make a real institutional change, etc. From this perspective, the compensation schemes in emerging countries probably challenge the generalizability of agency theory and call for greater theoretical and empirical contributions to the global literature. Appendix Selected Studies on Executive Compensation in Emerging Markets. Author(s) (Year) China Mengistae and Xu (2004)
Findings
Theory
Data and Sample
Survey data on 1. CEO pay sensitivity decreases Supports agency 769 SOEs in theory. with the variance of 36 two-digit Pay-performance performance. 2. The industries in sensitivity in performance from 1980 to four Chinese Chinese SOEs was 1989 sensitivity of CEO pay provinces. of a similar order increases with the marginal of magnitude as return to executive action. found in some 3. Incentives in Chinese SOEs regulated US is stronger than those of SOEs industries. in Bulgaria. (Continued)
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
521
(Continued) Author(s) (Year) Bai and Xu (2005)
Ding et al. (2006)
Firth et al. (2006a)
Firth et al. (2006b)
Findings China’s reforms in the 1980s introduced incentive mechanisms to induce SOE managers to change from passive command-driven behavior to a corporate mentality. Firm profits are not the only objective of the Chinese government in designing CEO contracts. Ownership, firm size, firm age, location, and industrial sector have significant impacts on the variances in Chinese managers’ compensation levels, structures, and benefits. Firms with a state agency as the major shareholder do not appear to use performance-related pay. In contrast, firms with private blockholders or SOEs as their major shareholders use performance-related pay. 1. Chairman turnover is related to a firm’s profitability but not to its stock returns. 2. Turnover-performance sensitivity is higher if legal entities are major shareholders.
Theory
Data and Sample
Supports agency theory and the incomplete contracts theory.
853 samples of managerial incentive contracts from more than 300 SOEs during the late 1980s.
Institutional factors affect compensation.
465 firms located in three major Chinese cities, Shanghai, Nanjing, and Guangzhou.
Support agency theory. The pay-performance sensitivities for CEOs are low.
549 listed companies and 1,647 firm-year observations from 1998 to 2000.
Support agency theory and institutional perspective. The study refutes the prediction of entrenched management.
2886 firm year observations in China from 1998 to 2002, using firm’s annual reports and CSMAR database.
(Continued)
3rd Reading
June 26, 2014
15:35
522
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility (Continued)
Author(s) (Year) Kato and Long (2006a)
Kato and Long (2006b)
O’Connor et al. (2006)
Buck et al. (2008)
Findings CEO turnover is significantly and inversely related to firm performance. Further, this relationship is moderated by ownership, the appointment of independent directors, CEOs’ additional positions among the controlling shareholders, etc. 1. Significant pay performance sensitivities and elasticities in terms of annual cash compensation (salary and bonus). 2. Sales growth is significantly linked to executive compensation. 3. Chinese executives are penalized for making negative profit. Liberalization forces stimulate SOEs to search for more efficient management control forms, which include the more extensive use of objective performance measures such as budgets and (indirectly) the provision of incentives. Executive pay and firm performance in China mutually affect each other through both reward and motivation.
Theory Support agency theory. Weak protection for outside investors leads to poor corporate governance.
Data and Sample 638 listed firms in China from 1999 to 2002, using CSMAR database.
942 listed firms in Support agency China from 1999 theory. The to 2002. ownership structure of China’s listed firms has important effects on the pay–performance link in these firms. Supports behavioral 1,203 listed firms in China from 1999 agency model. to 2002, using State ownership CSMAR database. weakens corporate governance quality in partial privatization.
Support agency theory and institutional factors.
601 listed firms in China from 2000 to 2003.
(Continued)
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
523
(Continued) Author(s) (Year)
Findings
Theory
Data and Sample
Supports behavioral 1,203 listed firms in 1. Firm profitability and China from 1999 agency model. state ownership are to 2002, using State ownership negatively related to CSMAR database. weakens corporate executive turnover only governance quality when firm profitability in partial is below target. privatization. 2. Executive turnover has a positive impact on subsequent firm profitability for performance below target, but has a negative impact for performance above target. 325 listed firms in Pi and Lowe CEOs’ power in structure, Examines forced CEO turnover from China from 1997 (2010) political connections, to 2006, using the perspective of and tenure can increase Stockstar website. CEO power. their ability to be insulated from involuntary replacement. CEO ownership power and the state-controlling shareholders reduce the likelihood of involuntary CEO turnover. The cultural context 3,706 firm-year Adithipyangkul Executive perk observations from may be one of the et al. (2009) compensation in China all firms traded on most important may perform both an the Chinese stock factors in incentive role to markets from 1999 determining an motivate managerial to 2004. optimal performance and a compensation productive role to design. facilitate and enhance production. Shen and Lin (2009)
(Continued)
3rd Reading
June 26, 2014
15:35
524
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility (Continued)
Author(s) (Year) India Ghosh (2006)
Korea Chang (2006)
Kato et al. (2006)
Findings
Theory
Data and Sample
Board compensation largely Extends the literature 462 firms in manufacturing on determination depends on current- and sector from 1997 of board past-year performance compensation in an to 2002 and diversification of the emerging economy firm, whereas CEO compensation depends on current-year firm performance only. Among the personal attributes of the CEO, only in-firm experience has significant influence on CEO compensation. The commitment HR 37 companies and Pay-for-individual 959 employees bundle on the performance and from 2000 to 2001, attitudes of commitment to HR using an MBA employees with practices does not have alumni survey. cultural values still effects on organizational differs from those commitment, but a in the US. positive interaction effect is found. 246 firms listed in Consistent with the 1. Cash compensation of KOSPI200 from recent literature on Korean executives is 1998 to 2001, the nature of significantly related to using KLCA Chaebols in Korea stock performance and database and the current the magnitude of the corporate sensitivity of pay to stock governance reform market performance is efforts in Korea comparable to the US and that are aimed Japan. 2. Overall primarily at significant executive Chaebol firms pay–performance link is driven by non-Chaebol firms and that no such link exists for Chaebol firms.
Notes: For details about the theoretical classification and sources, see Sun et al. (2010).
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
525
References Adithipyangkul, P., Alon, I. and Zhang, T. (2009). Executive perks: Compensation and corporate performance in China. Asia Pacific Journal of Management, 28(2), pp. 401–425. Aguilera, R. V. and Jackson, G. (2003). The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28(3), pp. 447–465. Allen, F., Qian, J. and Qian, M. (2005). Law, finance, and economic growth in China. Journal of Financial Economics, 77(1), pp. 57–116. Bai, C. E. and Xu, L. X. C. (2005). Incentives for CEOs with multitasks: Evidence from Chinese state-owned enterprises. Journal of Comparative Economics, 33(3), pp. 517–539. Ball, R., Robin, A. and Wu, J. (2000). Accounting standards, the institutional environment and issuer incentives: Effect on timely loss recognition in China. Asia Pacific Journal of Accounting and Economics, 7, pp. 71–96. Barkema, H. G. and Gomez-Mejia, L. R. (1998). Managerial compensation and firm performance: A general research framework. Academy of Management Journal, 41 (2), pp. 135–145. Bebchuk, L. A. and Fried, J. M. (2004). Pay Without Performance: The Unfulfilled Promise of Executive Compensation. Cambridge: Harvard University Press. Benito, A. and Conyon, M. J. (1999). The governance of directors’ pay: Evidence from UK companies. Journal of Management and Governance, 3(2), pp. 117– 136. Bertrand, M. and Mullainathan, S. (2001). Are CEOs rewarded for luck? The ones without principals are. Quarterly Journal of Economics, 116(3), pp. 901–932. Black, B. (2001). The corporate governance behavior and market value of Russian firms. Emerging Markets Review, 2, pp. 89–108. Buck, T., Liu, X. and Skovoroda, R. (2008). Top executive pay and firm performance in China. Journal of International Business Studies, 39, pp. 833–850. Carney, M., Gedajlovic, E. and Yang, X. (2009). Varieties of Asian capitalism: Toward an institutional theory of Asian enterprise. Asia Pacific Journal of Management, 26(3), pp. 361–380. Chang, E. M. (2006). Individual pay for performance and commitment HR practices in South Korea. Journal of World Business, 41(4), pp. 368–381. Cheung, Y. L., Stouraitis, A. and Wong, A. W. S. (2005). Ownership concentration and executive compensation in closely held firms: Evidence from Hong Kong. Journal of Empirical Finance, 12, pp. 511–532.
3rd Reading
June 26, 2014
15:35
526
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
Choi, J. P. and Cowing, T. (1999). Firm behavior and group affiliation: The strategic role of corporate grouping for Korean firms. Journal of Asian Economics, 10, pp. 195–209. Chu, E. Y. and Song, S. I. (2012). Executive compensation, earnings management and over investment in Malaysia. SSRN. Available at: http://ssrn. com/ abstract=2050862 (accessed on 28 March 2013). Claessens, S., Djankov, S. and Lang, L. H. P. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58, pp. 81–112. Conyon, M. and He, L. (2011). Executive compensation and corporate governance in China (ICS 2011-003). Cornell University, ILR School, Institute for Compensation Studies. Available at: http://digitalcommons.ilr.cornell.edu/ics/6 (accessed on 28 March 2013). Ding, D. Z., Akhtar, S. and Ge, G. L. (2006). Organizational differences in managerial compensation and benefits in Chinese firms. International Journal of Human Resource Management, 17(4), pp. 693–715. Edmans, A. and Gabaix, X. (2009). Is CEO pay really inefficient? A survey of new optimal contracting theories. European Financial Management, 15, pp. 486–496. Faccio, M., Lang, L. H. P. and Young, L. (2001). Dividends and expropriation. American Economic Review Papers, 91, pp. 54–78. Finkelstein, S. and Hambrick, D. C. (1989). Chief executive compensation: A study of the intersection of markets and political processes. Strategic Management Journal, 10(2), pp. 121–134. Firth, M., Fung, P. M. Y. and Rui, O. M. (2006a). Corporate performance and CEO compensation in China. Journal of Corporate Finance, 12(4), pp. 693–714. Firth, M., Fung, P. M. Y. and Rui, O. M. (2006b). Firm performance, governance structure, and top management turnover in a transitional economy. Journal of Management Studies, 43(6), pp. 1289–1330. Firth, M., Fung, P. M. Y. and Rui, O. M. (2007). How ownership and corporate governance influence chief executive pay in China’s listed firms. Journal of Business Research, 60(7), pp. 776–785. Gallego, F. and Larrain, B. (2012). CEO compensation and large shareholders: Evidence from emerging markets. Journal of Comparative Economics, 40(4), pp. 621–642. Ghosh, A. (2006). Determination of executive compensation in an emerging economy: Evidence from India. Emerging Markets Finance and Trade, 42(3), pp. 66–90.
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
527
Ghosh, S. (2010). Firm performance and CEO pay: Evidence from Indian manufacturing. The Journal of Entrepreneurship, 19(2), pp. 137–147. Gomez-Mejia, L. R. (1994). Executive compensation: A reassessment and a future research agenda. Research in Personnel and Human Resources Management, 12, pp. 161–222. Gomez-Mejia, L. R., Wiseman, R. M. and Dykes, B. J. (2005). Agency problems in diverse contexts: A global perspective. Journal of Management Studies, 42(7), pp. 1507–1517. Hall, B. J. and Liebman, J. B. (1998). Are CEOs really paid like bureaucrats? Quarterly Journal of Economics, 111(3), pp. 653–691. Houqe, N. (2011). Executive compensation and corporate performance: Evidence from an emerging market. Corporate Ownership and Control, 8(3), pp. 505– 510. Jensen, M. C. and Meckling, W. H. (1976). Theory of firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), pp. 305–360. Jensen, M. C. and Murphy, K. J. (1990). Performance pay and top-management incentives. The Journal of Political Economy, 98(2), pp. 225–264. Johnson, S., La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2000). Tunneling. NBER Working Paper 7523, National Bureau of Economic Research, Inc. Kaplan, S. N. (1994). Top executive rewards and firm performance: A comparison of Japan and the U.S. Journal of Political Economy, 102, pp. 510–546. Kato, T. and Long, C. (2006a). CEO turnover, firm performance, and enterprise reform in China: Evidence from micro data. Journal of Comparative Economics, 34(4), pp. 796–817. Kato, T. and Long, C. (2006b). Executive compensation, firm performance, and corporate governance in China: Evidence from firms listed in the Shanghai and Shenzhen Stock Exchanges. Economic Development and Cultural Change, 54(4), pp. 945–983. Kato, T. K., Kim, W. and Lee, J. H. (2006). Executive compensation, firm performance, and Chaebols in Korea: Evidence from new panel data. Pacific-Basin Finance Journal, 15, pp. 36–55. Khanna, T. and Palepu, K. (2000). The future of business groups in emerging markets: Long-run evidence from Chile. Academy of Management Journal, 43(3), pp. 268–285. Knop, N. and Mertens, G. (2010). The impact of ownership and board structure on CEO compensation in the Netherlands. Available at: http://www.rsm.nl/
3rd Reading
June 26, 2014
15:35
528
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Corporate Governance and Corporate Social Responsibility
fileadmin/default/content/home/content_pages/news/rsm%20news/news%20 current/ceo%20compensation%20in%20the%20nl%20%20rsm%20hewitt% 20072010.pdf (accessed on 28 March 2013). La Porta, R., Lopez-de-Silanes F., Shleifer, A. and Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58, pp. 3–27. Lazarides, T., Drimpetas, E. and Dimitrios, K. (2008). Executive board member’s remuneration: A longitudinal study. Corporate Ownership and Control, 6, pp. 94–103. Luo, Y. and Jackson D. (2012). Executive compensation, ownership structure and firm performance in Chinese financial corporations. Global Business and Finance Review, 17(1), pp. 56–74. Mengistae, T. and Xu, L. X. C. (2004). Agency theory and executive compensation: The case of Chinese state-owned enterprises. Journal of Labor Economics, 22(3), pp. 615–637. Morck, R., Shleifer, A. and Vishny, R. W. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, pp. 293–315. O’Connor, N. G., Deng, J. and Luo, Y. D. (2006). Political constraints, organization design and performance measurement in China’s state-owned enterprises. Accounting, Organizations and Society, 31(2), pp. 157–177. Otten, J. A. (2008). Theories on executive pay: A literature overview and critical assessment. MPRA Paper No. 6969. Available at: http://mpra.ub. unimuenchen.de/6969/(accessed on 28 March 2013). Palia, D. (2001). The endogeneity of managerial compensation in firm valuation: A solution. Review of Financial Studies, 14(3), pp. 735–764. Parthasarathy, A., Menon, K. and Bhatthacherjee, D. (2006). Executive compensation, firm performance, and corporate governance: An empirical analysis. Economic and Political Weekly, 41(47), pp. 4139–4147. Pi, L. and Lowe, J. (2010). Can a powerful CEO avoid involuntary replacement? An empirical study from China. Asia Pacific Journal of Management, 28, pp. 775–805. Salda´na, C. (2001). The Philippines. In Zhuang, J., Edwards, D. and Capulong, M. V. (eds.), Corporate Governance and Finance in East Asia: A Study of Indonesia, Republic of Korea, Malaysia, Philippines, and Thailand, 2. (Asian Development Bank), Manila, Philippines. Sen, A. and Sarkar, S. (1996). Age, experience and remuneration of managers of seven large Indian firms. Indian Journal of Labor Economics, 21, pp. 74–88.
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
Yongli Luo
529
Shen, W. and Lin, C. (2009). Firm profitability, state ownership, and top management turnover at the listed firms in China: A behavioral perspective. Corporate Governance: An International Review, 17(4), pp. 443–456. Shleifer, A. and Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), pp. 737–783. Su, Z., Li, Y. and Li, L. (2010). Ownership concentration and executive compensation in emerging economies: Evidence from China. Corporate Governance, 10(3), pp. 223–233. Suherman, Rahma, W. and Buchdadi, A. D. (2011). Firm performance, corporate governance, and executive compensation in financial firms: Evidence from Indonesia. SSRN. Available at: http://ssrn.com/abstract=1805532 (accessed on 28 March 2013). Sun, S., Zhao, X. and Yang, H. (2010). Executive compensation in Asia: A critical review and outlook. Asia Pacific Journal of Management, 27(4), pp. 775–802. Unite A. A., Sullivan M. J., Brookman J, Majadillas, M. A. and Taningco, A. (2008). Executive pay and firm performance in the Philippines. Pacific-Basin Finance Journal, 16, pp. 606–623. Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D. and Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal– principal perspective. Journal of Management Studies, 45(1), pp. 196–220. Zajac, E. J. and Westphal, J. D. (2004). The social construction of market value: Institutionalization and learning perspectives on stock market reactions. American Sociological Review, 69(3), pp. 433–457.
3rd Reading
June 26, 2014
15:35
9in x 6in
Corporate Governance and Corporate Social Responsibility
b1725-ch18
3rd Reading
