Regulatory restriction on executive compensation, corporate governance and firm performance

Purpose: The purpose of this paper is to investigate whether regulatory restriction on executive compensation in Chinese state-owned enterprises is beneficial to firm performance. The authors also examine the role of monitoring mechanisms in offsetting the effect of compensation restriction. Design/methodology/approach: Multivariate analysis is conducted using archival data from Chinese listed companies over the period of 2007-2014. Findings: The findings show that the restriction on executive compensation is negatively associated with a firm’s accounting performance, and this negative effect is ameliorated in firms with good internal control and a high level of institutional shareholding. Additional analysis reveals that the negative effect of pay restriction on firm performance is more pronounced in central government-controlled listed SOEs than in those controlled by local government. Originality/value: This study is the first to investigate a government’s say-on-pay policy. Specifically, the findings pinpoint the inefficacy of regulatory intervention in corporate executive compensation. The findings add to compensation literature using China’s unique institutional setting.