Gender diversity in compensation committees and CEO pay: evidence from China

Abstract

Purpose

The purpose of this paper is to address whether gender diversity on compensation committees ensures objective determination of CEOs’ compensation.

Design/methodology/approach

The authors use a sample of companies listed in China from 2006 to 2015. The authors use pooled ordinary least square regression as the baseline methodology, and two-stage least square regression and propensity score matching to control for endogeneity.

Findings

The authors find evidence that gender-diverse compensation committees limit CEOs’ total cash compensation and strengthen the link between CEO pay and firm performance, but only independent female directors have a significant impact, indicating that the monitoring effect outweighs the executive effect. Moreover, compensation committees with a critical mass of female directors have more impact on CEOs’ total pay and the link between CEO pay and firm performance than do committees with a single female director. Finally, gender-diverse compensation committees are more effective in setting CEOs’ compensation in state-controlled firms, where agency issues are more severe.

Practical implications

Female directors can improve firm-level governance by monitoring management actions, such as setting CEOs’ compensation. The study contributes to the debate on gender diversity in the boardroom, finding a positive economic effect. The study sheds light on China’s diversity practices at the director level and provides empirical guidance to China’s regulatory bodies.

Originality/value

The authors extend earlier studies by providing the first empirical evidence that gender-diverse compensation committees strengthen the link between CEO pay and firm performance; that independent female directors are more effective in the monitoring role than executive female directors; that compensation committees with a critical mass of female directors are more effective in setting CEOs’ pay than are committees with a single female director; and that the influence of gender-diverse compensation committees on CEOs’ pay varies by type of ownership.

Citation

Usman, M., Zhang, J., Wang, F., Sun, J. and Makki, M.A.M. (2018), "Gender diversity in compensation committees and CEO pay: evidence from China", Management Decision, Vol. 56 No. 5, pp. 1065-1087. https://doi.org/10.1108/MD-09-2017-0815