Independent directors’ political connections and CEO compensation : evidence from China

Abstract

This study investigates the relationship between independent directors' political connections and chief executive officer (CEO) compensation in Chinese listed firms from 2009 to 2018. Our empirical analysis reveals that politically connected independent directors (PCIDs) significantly reduce excessive CEO compensation. Channel tests demonstrate that this effect stems from PCIDs’ enhanced negotiation power relative to CEOs. The negative association between PCIDs and CEO compensation is attenuated in firms with politically connected CEOs but amplified in firms benefiting from substantial preferential bank loans and government subsidies. Heterogeneity analysis further shows that this negative relationship weakens in firms with stronger corporate governance mechanisms and state-owned enterprises (SOEs), while intensifying among firms led by experienced and talented CEOs. Our results remain robust across a battery of endogeneity checks and alternative specifications.