Blockholder rent appropriation and CEO compensation in an emerging economy: an examination of three types of blockholder–CEO relationships

This paper examines how principal–principal conflict influences chief executive officer (CEO) compensation in an emerging economy. To reduce the negative influence of blockholder rent appropriation (BRA) on firms, a controlling blockholder (hereafter, the blockholder) with strong power might exploit a CEO, the primary agent of a firm, leading to possible principal–agent (PA) conflict. In this case, such PA conflict can be negatively reflected in the CEO’s compensation contract. Drawing on the social theory of agency, we suggest that the cognitive frameworks and power relations of the blockholder and the CEO influence CEO compensation design. The cognitive framework explains that an optimal compensation design is affected by the social norm of CEO compensation and a CEO’s personal value system in an emerging market. Power relations indicate how blockholders may exercise their power for the optimal stringent CEO compensation design depending on their interdependent relationship with a CEO. Based on the two underlying mechanisms, we examine how BRA influences the compensation of the three types of CEOs who have different cognitive values and power relations with the blockholder, including a blockholder as the CEO, a blockholder-affiliated CEO, and a professional CEO. By analyzing 3,621 listed Chinese firms from 2006 to 2021, we find that BRA negatively affects the compensation of a blockholder CEO and a professional CEO, and has a negligible effect on that of an affiliated CEO. We further find that the negative effect of BRA on compensation is stronger for professional CEOs at state-controlled firms than those at private firms.