When a senior manager uses the company airplane is he misusing firm resources or does access to this perk incentivise him to work harder to add to the value of the firm? Academic research on perks has explored these two competing theories for decades however previous studies have primarily focussed on Western companies. CEIBS Cathay Capital Chair in Accounting Professor Ding Yuan and Assistant Professor of Finance Zhang Hua recently co-authored one of the first research studies to explore this question of incentive vs. cost in an emerging economy.

For their study, Profs Ding and Zhang and their co-author have examined data for companies listed on the Chinese stock market from 1999 to 2006 to better determine the conditions under which perks serve as an incentive for managers, and when they are merely a cost that benefits managers while detracting from firm value. China offers an ideal environment to test these two predominant theories on perks because Chinese companies tend to have a concentrated ownership structure with an identified controlling shareholder, while most US companies have a dispersed ownership structure and only rarely have a dominant shareholder. In addition, the social equity culture in China means that monetary compensation for top managers is much lower than for managers in Western companies, thus perks are popular forms of additional nonmonetary compensation in China as they are less visible than formal compensation packages.

The results of the study are largely consistent with the incentive view of perks, suggesting the ethical nature of perk consumption in the Chinese context. Second, the additional test reveals that the incentive view of perks plays a predominant role in firms where the large shareholders have more than 20% but less than 50% of controlling rights, which helps to further clarify the conditions under which the ethical use of perk is more likely to occur. This finding is very insightful given that this is the group of firms in which large shareholders have both the power and the necessity to use perks as part of effective contracting. The firms with controlling rights of less than 20% present the classic agency problem between managers and owners while those with controlling rights of greater than 50% feature controlling owners who become involved in firm operations to exercise tight control. In both cases, the incentive view is less relevant.

The findings of the study have important implications for the design of firm incentive systems, and are particularly helpful to foreign companies who want to better understand the complexity of employee incentives in China. The authors also suggest that while perks have been effective in Chinese companies in the short term, over the long-term Chinese companies need more transparent and sustainable incentive schemes that put more emphasis on cash compensation and stock options. 

The study is co-authored by Prof Ding, Assistant Prof Zhang, and Yuanyang Song of the School of Business at East China University of Science and Technology. The paper has  received the Chinese Management Research Fund Award from Emerald and the International Association for Chinese Management Research (IACMR).Entitled "What Drives Managerial Perks? An empirical test of competing theoretical perspectives", it is forthcoming in the Journal of Business Ethics.