Effort Redirection Across Multiple Career Tracks: Salary-Cut Policy and State-Owned Enterprises in China

Abstract

Prior literature in agency theory assumes that when incentives decrease, agents may shirk and reduce effort. We extend this work to multiple career tracks and suggest that a salary decrease may not necessarily lead to effort reduction, but instead may redirect efforts across multiple career tracks. Using an exogenous salary-cut policy shock levied on top executives of Chinese central state-owned enterprises (SOEs), our difference-in-differences analysis reveals that salary cuts motivate SOE top executives to redirect efforts from improving internal management (i.e., operational efficiency) to political objectives (i.e., job creation). A further test reveals that job creation mediates the relationship between salary cuts and SOE top executives’ political appointments. Moreover, top executive age, as an indicator of political incentive, and media coverage, which reflects external monitoring, weaken the impact of the salary-cut policy on effort redirection between the two career tracks. These findings provide implications for research on agency theory, SOEs, and public policy.