Executive compensation and corporate governance in China

MARTIN J.CONYON,LERONG HE

PAPER SUMMARY

This paper aims at a detailed study on executive compensation and CG in Chinese firms which
are listed in the stock exchange. For comparison the author of the paper also compared the
data with the firms of the USA.
The result was as expected. there is a positive connection between executive compensation
and firm performance in china. the paper used fixed effect panel data model to show the
relationship between executive payment and farm performance.
The panel data model was as follow

ln(PAY)it = αi + β1SHRit + β2ROAit + β3Xit + εit

natural log of payment to the executives is denoted by ln(pay). SHR is the return that is based
on the market. ROA is the return on asset that is the measure which is based on accounting
measure.
Fixed effect panel model is used here so that there is no heterogeneity problem. author also
used some variables as control variables like size of the firm, market value of the specific firm,
revenue amount, board composition. there is also some random error term to take error in
measurement.
The paper aims at showing the connection between executive payment and stock possession.
The most surprising fact is that, though there is a huge difference in the economic system in
china and the USA, the is almost the same for both of the country.
Both in china and in the USA the thing that determines the executive compensation is the size
of the firm. Despite different economic system, culture, and taxing system the corporate
governance characteristics of china and the USA are almost the same
Some vital findings of the paper are

1.The relationship between executive payment and firm performance supports the agency
theory.

2.to reduce the conflict of interest stock ownership is a popular tool both in china and in the
USA.in the both of the countries the value of the stock provided to the executives are much
higher than the amount of cash payment given to the executives.
3.state owned companies give less amount of stock to the executives as bonus or for stock
ownership.
4.the firm which have more independent directors, pay more for performance bonus.
5.if the performance is poor then there is a risk of termination of the top executive of the firm.
this phenomenon is normal in private firms rather state owned firms.

6.the executives of china less compensation than the executives of the USA. the executives of
the USA receive 17 times higher compensation than the executives of china.
The difference in the payment of the executives may arise due to the difference between
Economic system, the norms of the corporate system in both of the countries, tax system, and
accounting rules of the countries.

The author of the paper also thinks that corporate governance of Chinese firms maybe an eye
wash. they might show a better corporate governance to show themselves clean to the world
to avoid criticism