LAUSR

Purpose: In this paper, we investigate whether an independent and gender-diverse compensation committee strengthens the relationship between top managers’ pay and firm performance in Chinese companies. We also investigate whether the independent compensation committee composed of all male directors is effective in designing the optimal contract for executives. Methodology: We use data from A-share listed companies on the Shenzhen and Shanghai stock exchanges from 2005 to 2015. As a baseline methodology, we use pooled ordinary least square (OLS) regression to draw inferences. In addition, cluster OLS regression, two-stage least square regression, the two-stage Heckman test, and the propensity score matching method are also used to control for endogeneity issues. Results: We find evidence that an independent or gender-diverse compensation committee strengthens the link between top managers’ pay and firm performance; that the presence of a woman on the compensation committee enhances the positive influence of committee independence on this relationship; that a compensation committee’s independence or gender diversity are more effective in designing top managers’ compensation in legal-person controlled firms than they are in state-controlled firms; that gender diversity on the compensation committee is negatively associated with top managers’ total pay; and that an independent compensation committee pays top managers more. Practice Implications: Our results highlight the role of an independent compensation committee in designing optimal contracts for top managers. We provide empirical evidence that a woman on the compensation committee strengthens its objectivity in determining top managers’ compensation. Our finding supports regulatory bodies’ recommendations regarding independent and women directors. Social implications: Our findings contribute to the recent debate about gender equality around the globe. Given the discrimination against women, many regulatory bodies mandate a quota for women on corporate boards. Our study findings support the regulatory bodies’ recommendations by highlighting the economic benefit of having women in top management positions. Originality: This study contributes to literature by investigating the largely overlooked questions of whether having a gender-diverse or independent compensation committee strengthens the relationship between top managers’ pay and firm performance; whether an independent compensation committee is more efficient in setting executives’ pay when it is gender-diverse; and whether the effect of independent directors and female directors on top managers’ compensation varies based on the firm’s ownership structure. Overall, the main contribution of the study is that we provide robust empirical evidence in support of the managerial power axiom.