This paper examines the phenomenon and effect of peer group on executive compensation stickiness in China’s listed firms. We find that there has been substantial growth in executive compensation in the past 10 years, and consistent with agency theory, executive compensation is positively related to firm performance. However, the pay-for-performance sensitivity is asymmetric, and it is lower when the firm performance declines suggesting that there is a characteristic of executive compensation stickiness in Chinese firms. Further, we test the effect of peer group on compensation stickiness. We find that the characteristic of compensation stickiness only exists in the firms whose executive compensation is lower than the compensation of peer group. The evidence suggests that compensation stickiness is an important mechanism to provide retention incentives to firm managers, rather than agency problem in Chinese firms.
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