Numerous corporate executives in Hong Kong regularly receive compensation packages at par with the bosses of large firms in the United States. In some extreme cases, the combined pay of executives may exceed the net profits of the entire firm. Also, it is generally believed top executives often decide their own pay at will. Such a contention raises doubt on the corporate governance of Hong Kong-listed companies. In a study of 1,518 companies for which executive compensation data was available for the period from 1990 to 1994, we looked at the level of executive pay and its relations to a set of determining factors. The Owner-Director-Manager: In the US, top corporate officials typically own a small portion of the stock of the company. Also, these managers are, at least in theory, monitored by the board of directors, which oversees whether the overall performance of the firm is in line with shareholders' interests. US companies also are subject to a more restrictive environment in which to set compensation levels. Relevant factors include the presence of active groups of shareholders with a higher level of awareness on their rights. Hong Kong-listed companies tend to be dominated by major shareholders, either in the form of individual investors or family members. These shareholders usually hold executive positions and directorships of the companies. In other words, the monitor and the monitored are the same people. In the sample of companies it was found the median ownership percentage of the board of directors was 47.3 per cent. Components of Compensations: Because Hong Kong company directors are wearing the hats of the director and the manager simultaneously, they also are compensated in the same fashion. The take-home element of compensation consists of two parts: the director's fee and emoluments. The former is a sum, usually a relatively fixed amount for all directors of the same firm, in compensation for their service on the board of directors. The latter is similar to a salary plus bonus, and may differ significantly among the directors of the same firm. The pay for the role of directors is lower than the reward for the role of the manager. The median of the director fee is $100,000 while the median of emoluments is $4.5 million. These figures represent the combined amounts for a typical group comprising four or five directors. In terms of the relative significance of these figures, the median company pays out about 8 per cent of its net profits to its directors. Measures of Corporate Performance: In attempting to relate directors' pay to company performance, we chose to use stock return and the 'q-ratio'. Stock return is taken as the sum of dividends and stock price appreciation in a one-year period. In other words, we tried to measure how well managers performed in terms of the return they generated for shareholders. The 'q-ratio' is an indicator of management quality. The value of the 'q' of a firm is defined as the ratio of the stock price to the book value of equity, or net assets free of debt. In general, the higher the stock market values a firm for its management, rather its assets, the higher the 'q-ratio'. We analysed directors' compensation using compensation as a percentage of net profits, and compensation as a percentage of operating income. Our sample period is from 1990 to 1994. In order to put the figures on a common basis, we adjust all variables to the price level of 1990. The table (below left) summarises some preliminary results. We divided our sample of 1,518 firms into three equal size sub-groups. In general, we found that firm size is a significant determinant of director compensation. The larger the firm size, the higher is the pay level. This finding is also consistent with that of the other markets. Furthermore, there is strong evidence that compensation as a percentage of net profits is inversely related to firm size. A similar result is obtained for the compensation as a percentage of operating income. These results implied smaller companies were paying out a larger portion of their income in the form of directors' compensations. Another interesting issue is on the relationship between director compensations and a company's performance. The question is simply whether the chief executive officer is rewarded according to firm performance. Our analysis showed that firm performance does not have an influence on director compensation. An exception to this pattern was found in the large firm sub-group in which pay was positively related to performance. Ownership by directors did not appear to have any significant effect on compensations. Finally, we found that director remunerations were sometimes larger than the profits of companies, or directors continued to draw large compensations when the company was losing money. Of the sample group of companies, there were 132 such cases. In one extreme example, the directors paid themselves 76 times the net profits of the company.