Using a unique data set containing information on 4759 executives in 450 publicly-listed firms in China during 1999 and 2002, we investigate several aspects of tournament theory of executive compensation in the context of a transitional economy. We find that (1) pay increases as managers move up the corporate hierarchy; (2) pay gap between the first and the second tier managers is the largest of all ranks; (3) pay dispersion increases with the number of second tier managers and the risk of business environments; (4) larger pay dispersion leads to better firm performance, which is against the prediction of equity, relative deprivation, and sabotage theories; (5) a stronger presence of independent directors and outside supervisors is accompanied by greater pay dispersion; and (6) state ownership and CEO’s dual role as board chair are associated with deteriorating firm performance.
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