Differentiated governance of executive compensation in Chinese state-owned enterprises

In the context of differentiated governance and the deepening market-oriented reform of compensation in China, we divide state-owned enterprises (SOEs) into four categories according to their equity structure, namely absolute holding firms, relative holding firms, major impact firms and equity participation firms, to examine the current situation and effectiveness of differentiated governance for executive compensation. We report four main findings. First, executive compensation levels, compensation gaps and equity incentives increase as government control decreases, indicating the emergence of differentiated governance of executive compensation in SOEs. Second, the driving force behind differentiated compensation is the government’s willingness to intervene in SOEs. The government’s ability to intervene in SOEs is not diminished by reduced equity control, and the government may even compensate for such a reduction by appointing excess executives. Third, differentiated governance of compensation is more prominent in local and competitive SOEs, while equity incentives lag significantly behind salary levels and salary gap incentives. Fourth, differentiated governance of compensation levels and gaps are effective in reducing agency problems and enhancing innovation in SOEs; however, the impact of equity incentives is limited. These findings enrich the literature on the differentiated governance of SOEs and facilitate a more comprehensive understanding of executive incentive and compensation contracts in Chinese SOEs.