Manager or Politician? Effects of CEO Pay on the Performance of State-Controlled Chinese Listed Firms

We examine the effects of chief executive officer (CEO) pay on two performance outcomes for central government-controlled Chinese listed firms: financial performance (return on assets, which is associated with the interests of all shareholders) and political performance (job creation, which reflects a primary objective of the controlling owner, the state). We posit that China’s mixed economy places state-owned enterprise (SOE) executives on dual career tracks—business and politics—and their career interests are differentially aligned with the divergent interests of minority shareholders and the state, respectively, depending on the firm’s position in the corresponding enterprise group. Based on a sample of 2,145 firm-year observations from 230 state-controlled Chinese listed firms between 2004 and 2014, we find that higher CEO pay leads to a higher return on assets. This relationship is strengthened when there are more hierarchical layers above the focal firm in the business group, when there is more potential political competition from other group affiliates, and when there is a nonstate second-largest shareholder. Higher CEO pay also leads to greater job creation, but this relationship is weakened by political competition and nonstate second-largest shareholder.