Executive Compensation and the Three-Dimensional Reference Framework: Insights from Data Analysis of Chinese Publicly Traded Firms

Abstract

This paper examines the impact of different reference points on executive compensation of Chinese listed companies by applying three dimensional reference point theory. Drawing on a panel data of 1,236 non-financial Chinese listed companies over the period of 2008 to 2012, it provides evidence that the three dimensions which are composed of external, internal, and time are all positively and significantly related to the average cash compensation of the top three highest paid executives in China. The research also finds a significantly positive relationship between the joint effect of these dimensions measured by factor and the top three executive pay level. The result suggests that the Chinese listed companies usually refer to the pay level of their peer groups, other executives within firms, and previous period to design the compensation packages for their top executives. It finds that all three dimensions comprising external, internal and time are significantly and positively related to the average cash compensation of the top three highest paid executives. The paper further examines the relationship between the three dimensional reference points and executive compensation, and reveals other determinants other than performance, thus contributing to the discussion on the determinants of executive compensation in the corporate governance literature and important policy implication for Chinese authorities.