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| Corporate Reputation and Executive Compensation: Public Service or Career Reputation |
| HAO Ying, HUANG Yuxiu, NING Chong, GE Guoqing
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Business School, Beijing Normal University;
School of Management, Shandong University;
School of Economics and Management, Tsinghua University |
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Abstract Explicit incentives based on the salary contract and implicit incentives based on reputation and vocational development are the most common incentives for company executives. In recent years, due to the unexplainable paradox between low explicit executive compensation and rapid business growth, scholars have increasingly examined the role of implicit incentives in executive contracts, especially the reputation and vocational development incentives. In particular, due to the salary ceiling, executive compensation in state-owned enterprises (SOEs) and management fees are strictly controlled. However, executive positions in SOEs have great professional appeal, making it necessary to examine the role of compensation contracts in corporate governance and the special role of executive incentive mechanisms.
As an ancient Chinese adage goes, “the heart of a scholar and the idea that the world is for all.” Based on that notion, intellectuals often serve society by joining the bureaucracy. Serving in an SOE is another way to improve one's public status and gain social recognition.Since the beginning of China's reform and opening up, especially in the 1990s, some officials have given up their positions to go into business, creating a culture of pride in business. In the context of the current economic transformation and market prosperity, many people are no longer attached to the idea of “serving in a government department” and believe that they could gain a professional reputation and realize their value by holding a position in a company.
Based on the implicit-explicit contract incentive research paradigm, this paper investigates the effect of corporate reputation on executive compensation and its mechanism of influence. Using data from non-financial A-share listed firms from 2009 to 2017, the main conclusions of this study are as follows: (1) corporate social reputation is a valuable resource that can satisfy the reputation preferences of senior executives such that they are willing to accept lower explicit compensation. (2) Under the special institutional background of “ambition to public service” and “pride in business” in China, different types of corporate social prestige have different effects on executive compensation. (3) Using a DID model to investigate changes in executive compensation after companies enter and exit the ranks of prestigious companies, we find that companies with high social prestige pay low executive compensation. After propensity score matching, the regression results support our hypothesis. (4) The results also show that after working in a company with a good reputation, senior executives not only have a greater reputation incentive but also have greater future career interest. Compared with those working at general listed companies, such executives are more likely to be promoted.
The main contributions of this paper are as follows. First, this paper is motivated by the research perspective of personal reputation and examines the influence of personal reputation on executive motivation from the perspective of corporate reputation, expanding the literature on the influencing factors of explicit executive compensation. Second, based on the traditional concept of public service and preferences for obtaining professional reputation, we discuss two mechanisms of the influence of corporate social reputation on explicit executive compensation. Third, the results show that corporate social reputation can be used as compensation or as a substitute for monetary compensation for senior executives, enriching the literature on the internal substitution factors of executive compensation. In addition, in the context of compensation regulations, this study provides a better understanding of corporate reputation and executive compensation bargaining power, and provides a meaningful reference for companies to improve their governance efficiency and design effective compensation contracts.
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Received: 29 January 2019
Published: 02 November 2020
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