Does a Decentralized Decision Structure Affect Executive Compensation? Evidence from Chinese Business Groups

Using a unique sample of Chinese business group firms required by the government to disclose double financial statements for the parent and its subsidiaries, we examine the impact of a decentralized decision structure on executive compensation and further tests its mechanism. Our findings show that firms with a more decentralized power structure pay their group managers less, suggesting that such a power structure acts as a governance tool to mitigate the astronomical salaries of Chinese managers. The results are robust to alternative metrics of decentralized power structure and executive compensation. Additional analysis shows that the management’s bargaining power mitigates this negative relationship while the information environment reinforces this negative relationship. However, managers respond by increasing the probability of leaving their jobs. Generally, our results suggest that the allocation of decision rights is a determinant of executive compensation