Pecuniary and Non-Pecuniary Compensation and Firm Performance: Some Evidence from Chinese State Dominated and Non-State Dominated Enterprises

The objective of this paper is to provide evidence on executive compensation for state dominated enterprises (SDEs) and non-state dominated enterprises (NSDEs) in China and on the compensation-performance relation for these two groups of companies. China provides a unique setting to evaluate the compensation-performance relation as executives of SDEs receive both pecuniary and non-pecuniary compensation, while executives of NSDEs receive relatively less non-pecuniary but greater pecuniary compensation. We predict that (i) the pecuniary compensation of executives of SDEs is lower than that of NSDE executives, and (ii) due to the non-scaleable nature of non-pecuniary compensation, there is no difference in the compensation-performance relation across SDEs and NSDEs. Our results confirm our predictions and are robust with respect to a number of sensitivity tests. This suggests that efficient governance choices may include both pecuniary and non-pecuniary compensation, with this being particularly important for firms in emerging capital markets.