Abstract: How to improve the effectiveness of executive incentive system is a central issue in corporate governance, which is closely associated with the success of the reform of state-owned companies. The existing literature pays more attention to the role of absolute compensation but ignores the impact of relative compensation. When relative compensation declines, will executives have the motivation and ability to adjust compensation levels? This paper finds that there is a phenomenon of “compensation comparison” in state-owned enterprise groups, which means that after observing the compensation rise of other executives in the same group, executives will significantly increase their own compensation in the next year. The mechanism tests show that when the comparison motivation of executives is stronger, the bargaining ability of executives is stronger and the internal and external supervision is weaker, the phenomenon of compensation comparison is more obvious. The findings of our paper offer direct empirical evidence of compensation comparison, help to understand the effectiveness of the compensatory contract in developing countries, provide reference to better encourage state-owned company executives and promote the transformation of compensation system of state-owned companies.

Key words: business group, compensation comparison, executive compensation