1. ¹Business School, Loughborough University, Loughborough, UK
2. ²Business School, Nottingham University, Nottingham, UK

Correspondence: T Buck, Business School, Loughborough University, Leicestershire LE11 3TU, UK. Tel: +44 1509 223123; Fax: +44 1509 263171; E-mail: t.w.buck@lboro.ac.uk

Received 19 April 2005; Revised 29 August 2007; Accepted 10 December 2007; Published online 17 April 2008.

Abstract

The sensitivity of executive pay to share price performance has been the main focus of Western executive pay studies, reflecting shareholders' efforts to reduce agency problems by better aligning the rewards of executives with their own. However, these studies have ignored motivational effects and possible two-way pay–performance causation. This paper reports Chinese executive pay–performance sensitivity, with international comparisons, to examine whether China's unique institutional environment has produced outcomes consistent with those for Western market economies. This same unique environment makes possible the first estimates of two-way causation based on panel data analysis. The results show that executive pay and firm performance mutually affect each other through both reward and motivation.