The detachment of operating rights and ownership incurs so-called agency problem. Due to the inconsistency of owners and operators, operators in pursuit of their own interests are likely to damage the interests of the share- holders. Compensation research based on agency theory is divided into two schools, one is the principal-agent theory, which is also known as information economics, and the other is positivism, which mainly researches on managers’ pay-performance sensitivity.

The most basic way contact managers and shareholders is the performance of enterprises. Agency costs arise because of managerial self-interest behavior. In order to reduce agency cost, shareholders have to directly link executive compensation to enterprise performance. From this viewpoint, we think that the performance of the company is the basic factor to determine the level of executive compensation.

Human capital theory discusses the salary decision mechanism from the viewpoint of management of their own. Executives with a greater ability to bring more profits to the enterprises should get more pay.

Agrawal [12] found that executive pay level actually depended on the marginal productivity, which was de- termined primarily by the operator’s human capital investment, including experience, tenure and education level. Human capital is a special property right because it can only exist in the executive’s body, not be separated from the managers and exist alone. At the same time, as a decision maker, manager not only needs to have the ad- vanced management idea and abundant professional knowledge, but also a keen insight and control of the situa- tion. All of these have influence on the executive compensation.

Agency theory deems that designing the optimal compensation contract will bring about the biggest wealth for shareholders; while managerial power theory has a counter idea that managers can influence compensation con- tract design, for they have the ability to influence the decisions of the board. Bebchuk [13] put forward a new compensation theory based on managerial power: that is, the negotiation between the board on behalf of share- holders and managers is a very complex multi-agency relationship. It leads managers to use their power to in- fluence the decisions of the board, thus making compensation deviate from the optimal contract, so the salary decision process will become a way for managers rent seeking. Due to the failure of corporate external gover- nance mechanism, managers actually control the process of their remuneration decision, and this power usually depends on the form of the board and ownership structure.

The industry factor has two main effects on executive compensation: First, different industries with differences in profit model, profit level and risk, lead to different executive compensation. In general, the more intense of industry competition, the higher level of executive compensation. At the same time, fierce competition will im- prove the liquidity of the executives, so enterprises would improve the compensation in order to retain talent ones.

Mengistae and Xu [14] , Firth, et al. [15] [16] , Li, et al. [17] , and Conyon and He [18] found that the compensa- tion level increased with firm size, possibly because larger firms are more complex and hence require more management skills or because they have a larger resource base to attract top talent with higher salaries. In addi- tion, the larger the enterprise scale, the more difficult to supervise the executive. In order to reduce agency cost, business owners will adopt the above-market compensation to motivate executives to work hard.

Agency theory suggests firms will link pay to performance to motivate managers [19] . As we know, there is asymmetric information flow between the managers and the owners. The company owners will base the execu- tive’s pay on the corporation’s performance in order to reduce the agency costs. Thus, executive compensation should not be contact with the performance of enterprises, but also with the performance of stock markets. However, it is worth noting that cash compensation for executives dominates stock options in Chinese listed companies. Considering the limitations of information disclosure of stock options of executives, also following Firth et al. [15] and Kato and Long [11] , we only consider the cash compensation for executives in the current study.

Enterprise location also has a greater impact on executive compensation. There exist great differences in differ- ent regions in terms of executive’s compensation. Cities such as Beijing, Shanghai, Guangzhou are developed regions, and the central and western regions are relatively backward. Generally speaking, executive pay in de- veloped areas is much higher than that in less developed areas. From the results showed below that the average executive compensation in developed areas (RMB539987.28) is almost twice as much as that in underdeveloped areas (RMB287220.10).

The proportion of independent directors will be an important factor influencing executive salaries. According to Weisbach [20] , independent directors have no direct interest relationship to executives, so they can be more ob- jective and impartial when evaluating executive, from the viewpoint of the share holders’ interests. In addition, the independent directors are the elite from various sectors, and they are willing to take the initiative to supervise the executive, in order to keep their reputation. However, other researches have different viewpoints. In order to remain with the company, independent directors generally will not challenge executive’s pay, because CEO has the ability to nominate and replace independent directors. In addition, independent directors are usually served in many companies, and they have no enough time to involve in the company’s daily operations. As a result, they do not quite understand corporation performance to make an objective evaluation on executive’s contribu- tion [21] .

According to the management power theory, the more dispersed the ownership structure of the company, the easier the agent is to control the company. In this way, the agent (manager) will be in the dominant position in the process of compensation contract negotiation for a high pay. On the contrary, if the ownership structure of enterprises is more concentrated, the principal (owner) rather than agent can control the compensation contract terms, making the executive in the inferior position with a relatively lower pay. One of the major characteristics of Chinese state-owned monopoly enterprises is the domination by controlling share holders. The shares owned by central government usually reach 50%, even higher. This owner ship structure weakens the effectiveness of corporate governance. So we can speculate that the government will limit executive’s authority on compensation self-making, to avoid excessive high pay.

As business manager, executives need a lot of management ability. According to human capital theory, execu- tive compensation should be linked with knowledge and skills. With age growing, richer experience and gradu- ally improving management skills, executive’s salary level should also be improved. At the same time, rich so- cial experience expands the executive’s social resources, making them more likely to work, also get higher pay.

There is evidence that executive compensation levels are lower in firms with separate leadership positions [22] [23] . CEO duality not only damages the independence of the board of directors, but also makes the insider con- trol problem more serious. CEO at the same time as the chairman of the board, has more power on compensation determination, leading to a high pay level. It is worth pointing out that, China Securities Regulatory Commission (CSRC) proposed the separation of duties as an important measure for the effectiveness of corporate gover- nance.

According to the theory of micro economics, market prices is determined by market supply and demand, what is also true in the labor market. If talent available is in short supply, enterprises have to raise the pay to attract them; on the contrary, if the labor oversupply, enterprises can introduce talents with low compensation, helping to re- duce production costs.

Executive compensation will be affected by the national policies, laws and regulations. Especially for the state- owned monopoly enterprises, executive’s behavior is subject to the relevant policies and regulations which sup- port or restrain their high pay.

This paper studies influencing factors of executive compensation in China’s monopoly industries. Based on the factors illustrated above and data quantifiable, our hypotheses are developed as follows:

Hypothesis 1: Executive compensation is positively correlated to firm performance.

Hypothesis 2: Executive compensation is positively correlated to firm size.

Hypothesis 3: Executive compensation is positively correlated to CEO duality.

Hypothesis 4: Executive compensation is negatively correlated to independent director proportion.

Hypothesis 5: Executive compensation is negatively correlated to state share proportion.

This article only considers the top three executives remuneration packages which include the fixed remuneration (basic salary) and short-term compensation (variable pay). We use EC, which is measured by the average pay of top three executives, as our dependent variable.

Following prior literature and considering the China-specific context, we examine our research questions by de- termining these independent variables, including firm performance, firm size, board independence, ownership structures, CEO duality.

The net asset return rate (ROE), reflecting the profitability of a corporation, is adopted to measure firm per- formance. Since the corporations with varying sizes will give out different remuneration packages, this paper uses the log of total assets (denoted SIZE) as an indicator of the firm size. The percentage of independent di- rectors on the board (denoted IDR) is used as a proxy of board independence. In monopoly companies, the larg- est shareholder is usually the State, so we use the state share proportion (denoted FST) to reflect ownership structures. To measure the separation of duties, we include a dummy variable, DUAL, to indicate whether the chairman of the directors board is also the CEO of the company, which equals one if the same person assumes both positions, and zero otherwise. According to the location of the company, we divide the whole sample into two parts—developed areas and underdeveloped areas. 11 provinces and autonomous regions, including Bei- jing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Hainan are clas- sified as the developed areas. The synthetic variable AREA indicates whether the location is in underdeveloped areas (0 value) or developed areas (1 value).

We include a set of time dummies (denoted YEAR) to capture year effects and industry dummy variables (de- noted IND) to capture industry variation. The industry classification is based on the “China Statistical Yearbook (2007)” categorization specified above.