y over-estimate the proportion of shares truly under foreign control. We use
B shares ownership as one measure of the proportion of shares held by foreign investors (the
other being H shares). Foreign shareholding is generally considered beneficial because foreign
shareholders are more effective in monitoring the firms in which they put their money. Hence,
from a corporate governance viewpoint, foreign shareholding can be viewed as restraining CEO
compensation. However, in terms of managerial compensation practice, significant foreign shareholding
suggests that the firm is closer to international pay standards, which calls for higher wage
dispersion, and therefore suggests a higher, as opposed to a lower CEO compensation.
H shares represent the shares of companies incorporated in China, but listed in Hong Kong.
We use H shares ownership to measure the proportion of H shares over total shares. As a result
of Hong Kong’s strict listing regulations, only the larger and more profitable Chinese firms have
issued H shares. As for B shares, we assume that H shares indicate that the firm is closer to
international pay standards which call for higher wage dispersion and, therefore, higher CEO
compensation.
2.3. Control variables
We use four variables to control for CEO compensation: CEO age and years in tenure, firm
size and growth rate.
CEO age has a significant positive association with CEO compensation. Recent research suggests
that compensation schemes should explicitly include CEO age in order to mitigate CEO
horizon problems. In fact, Dechow and Sloan (1991) and Gibbons and Murphy (1992) indicate
that older CEOs have a bias towards short-term projects whose payoffs are due before their retirement.
Firms should therefore make use of deferred compensation schemes instead of cash payments
to restore CEO p
References for long-term value-creating investments (Ryan and Wiggins,
2001).
CEO tenure is also positively associated with CEO compensation, not only for firms known
to reward employees for their loyalty. Ryan and Wiggins (2001) present two reasons for this
association. The first is that CEO tenure may be due to consistent performance, which also
warrants a higher compensation. The second is that CEO tenure increases the CEO’s influence
on the board, and facilitates the awarding of higher compensation. However, in the case
of a rapidly changing economy like China, age and tenure may be less positively associated
with competence as younger managers may more easily acquire modern management
skills.
According to Murphy (1999), the association between firm size and CEO compensation is
one of the best-documented stylized facts regarding CEO pay. Rosen (1992) argues that larger
firms have more growth opportunities and complex operations, which require higher quality
managers who should receive higher compensation. Ciscel and Carroll (1980), Baker et
al. (1988) and Core et al. (1999) provide empirical evidence that managers are paid more in
larger firms. Bliss and Rosen (2001) observe that managers increased their compensation after
mergers, because of the resulting larger firm size, even though the firm’s performance did not
improve. Outside the U.S., Kaplan (1994) shows that Japanese firms also compensate their CEO
largely according to their size. Firth et al. (1999) document a similar relationship for Hong
Kong firms.
Agency
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