Stockholm School of Economics Asia Working Paper Series,
Stockholm School of Economics, Stockholm China Economic Research Institute

Abstract: This paper investigates CEO incentives in Chinese state-controlled firms. We find that firm performance has a positive effect on CEO compensation. We also find that firm performance is positively associated with CEO promotion and negatively associated with CEO turnover. CEOs for state-controlled firms thus face significant incentives, not only in monetary form, but also in terms of career prospects. These results suggest that the CEO labor market in the Chinese state sector exhibits characteristics similar to those of managerial labor markets in developed countries, at least during our sample period. Moreover, we show that local institutions have a significant impact on the relationship between CEO incentives and firm performance, with performance having a larger effect on CEO compensation, promotion and turnover in regions characterized by stronger institutions. Overall, our results demonstrate that firm performance is associated with CEO incentives also for state-controlled firms in China, suggesting that there is a functioning labor market for top managers in the Chinese state sector.

Keywords: State-controlled firms; Managerial labor market; Performance; CEO compensation; CEO promotion; CEO turnover; China

JEL-codes: G30; G38; J30; M52; P30

57 pages, September 6, 2013

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