Paying for the quality of life: The impacts of urban livability on CEO compensation

Abstract Combining the data of executive compensation of Chinese listed companies and urban livability from 2009 to 2016, this study explores the relationship between executive pay of listed firms and urban livability of the city where the firm is based. We find executive pay drops as urban livability gradually improves, showcasing urban livability's compensation effects on executive pay at firms at the city. At the mean value of the samples, each unit increase in urban livability will reduce executive pay by 30.8%. This study further analyzes the heterogeneity in terms of company size, company age, bargaining ability, ownership property and industry characteristics of the company. The results show that the executive pay is more sensitive to the change of urban livability in larger companies, older enterprises, state-controlled firms, companies with weak bargaining power, and enterprises receiving preferential industrial policy. To mitigate potential endogeneity of urban livability and executive pay, we use earthquake number as the instrumental variable for urban livability, and the results are consistent with the benchmark regression results. This study not only contributes to literature on nonmonetary incentives in executive pay but is of practical significance in cost-benefit analysis of urban livability improvement in developing countries.