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Restricting CEO Pay Backfires : Evidence from China

  • Kee-Hong Bae Schulich School of Business, York University
  • Zhaoran Gong Hong Kong Polytechnic University
  • Wilson H.S. Tong Hong Kong Polytechnic University
Using the pay restriction imposed on CEOs of centrally administered state-owned enterprises (CSOEs) in China in 2009, we study the effects of limiting CEO pay. Compared with firms not subject to the restriction, the CEOs of CSOEs experience a significant pay cut. Pay-performance sensitivity for these firms also significantly decreases. In response to the pay cut, CEOs increase their consumption of perks and siphon off firm resources for their own benefit. Ultimately, the performance of these firms drops significantly following the pay restriction. Our findings suggest that restricting CEO pay distorts CEO incentives and brings unintended consequences. Our findings caution against limiting the pay of CEOs.

  • Kee-Hong Bae
  • Zhaoran Gong
  • Wilson H.S. Tong
Using the pay restriction imposed on CEOs of centrally administered state-owned enterprises (CSOEs) in China in 2009, we study the effects of limiting CEO pay. Compared with firms not subject to the restriction, the CEOs of CSOEs experience a significant pay cut. Pay-performance sensitivity for these firms also significantly decreases. In response to the pay cut, CEOs increase their consumption of perks and siphon off firm resources for their own benefit. Ultimately, the performance of these firms drops significantly following the pay restriction. Our findings suggest that restricting CEO pay distorts CEO incentives and brings unintended consequences. Our findings caution against limiting the pay of CEOs.