Political ranks, incentives and firm performance

Managers in China’s state-owned enterprises (SOEs) keep their ranks within a political hierarchy system either explicitly or implicitly, and enjoy different kinds of welfare affiliated to these ranks. In this paper, we analyse how the political rank system works as an incentive on the managers of SOEs and empirically examine the effect of political hierarchy on firm performance. We find that the higher is the political rank of a firm’s manager, the better the firm performs. We further find that managers’ cash compensation does not increase with their political rank, suggesting that political rank provides incentives in addition to cash compensation.