Relationship network of firms and executive compensation: Theoretical model and empirical findings

Theoretically, this study investigated the effects of the density of firms' relationship network on executive compensation and pay-performance sensitivity by developing a theoretical model. Using a dataset of Chinese listed firms over the period 2005-2010, this study quantized the density of relationship network, and tested conclusions drawn by our theoretical model. The result shows that about 83% of Chinese listed firms have at least one director/CEO who also works as a director/CEO in other listed firms. Consistent with the theoretical model, this study also shows that the greater density of firms' relationship network is associated with significantly higher level of executive compensation, but significantly lower pay-performance sensitivity.