Political Promotion, CEO Incentives, and the Relationship Between Pay and Performance

Abstract

Both theory and empirical evidence suggest that managers’ career concerns can serve as an important source of implicit economic incentives. We examine how incentives for political promotion are related to compensation policy and firm performance in Chinese state-owned enterprises. We find that the likelihood that the CEO receives a political promotion is positively related to firm performance. We also find that CEOs with a higher likelihood of political promotion have lower pay levels and lower pay–performance sensitivity. Overall, the evidence suggests that competition in the political job market helps mitigate weak monetary incentives for CEOs in China. Data are available at https://doi.org/10.1287/mnsc.2017.2966 . This paper was accepted by Lauren Cohen, finance.