Integrity, CEO compensation, and performance: Evidence from public enterprises in South Korea

Cho, Moon Kyung; Lee, Ho Young; Yoon, Inkyung Article Integrity, CEO compensation, and performance: Evidence from public enterprises in South Korea Global Business & Finance Review (GBFR) Provided in Cooperation with: People & Global Business Association (P&GBA), Seoul Suggested Citation: Cho, Moon Kyung; Lee, Ho Young; Yoon, Inkyung (2023) : Integrity, CEO compensation, and performance: Evidence from public enterprises in South Korea, Global Business & Finance Review (GBFR), ISSN 2384-1648, People & Global Business Association (P&GBA), Seoul, Vol. 28, Iss. 3, pp. 15-34, https://doi.org/10.17549/gbfr.2023.28.3.15 This Version is available at: https://hdl.handle.net/10419/305896 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/4.0/ Received: Jan. 10, 2023; Revised: Mar. 12, 2023; Accepted: Mar. 22, 2023 † Inkyung Yoon E-mail: [email protected] ⓒ Copyright: The Author(s). This is an Open Access journal distributed under the terms of the Creative Commons Attribution Non-Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted non-commercial use, distribution , and reproduction in any medium, provided the original work is properly cited. GLOBAL BUSINESS & FINANCE REVIEW, Volume. 28 Issue. 3 (JUNE 2023), 15-34 pISSN 1088-6931 / eISSN 2384-1648∣Https://doi.org/10.17549/gbfr.2023.28.3.15 ⓒ 2023 People and Global Business Association GLOBAL BUSINESS & FINANCE REVIEW www.gbfrjournal.org1) Integrity, CEO Compensation, and Performance: Evidence from Publi c Enterprises in South Korea Moon-Kyung Choa, Ho-Young Leeb, Inkyung Yoonc† aAssociate Professor, A.R. Sanchez, Jr. School of Business, Texas A&M International University, USA bProfessor, School of Business, Yonsei University, Korea cInstructor, School of Business, Yonsei University, Korea A B S T R A C T Purpose: The purpose of this paper is to analyze perceived integrity of public service users and public enterprise employees in association with public enterprise performance, and the role of the CEO compensation on the association between perceived integrity and public enterprise performance. Design/methodology/approach: This study uses publicly available performance evaluations and CEO compensation disclosures by the Ministry of Strategy and Finance (MOSF) in South Korea and integrity assessments by the Anti-Corruption & Civil Rights Commission of Korea from 2014 to 2017. Findings: We find a positive association between integrity and public enterprise performance, a result driven by the positive association between integrity perceived by service users and public enterprise performance. Furthermore, higher monetary compensation paid to CEOs has a negative influence on the relationship between integrity perceived by public service users and public enterprise performance, whereas higher compensation paid to CEOs has a positive influence on the relationship between integrity perceived by employees and public enterprise performance. Research limitation/implications: Integrity perception might be subject to bias depending on the type of stakeholders (public service users or public enterprise employees). Thus, information users of public enterprise performance reports need to be aware of perception gaps in relation to multi-faceted aspects of public enterprise performance. We provide insights into the relationship between perception of integrity and public enterprise performance of the government bodies who enact and administer laws and public policies. Originality/value: This paper captures how the perceptions of integrity, as assessed by diverse stakeholders with differing perspectives and levels of honesty and transparency, influence public enterprise performance assessments. Furthermore, it extends the findings of prior studies on the impact of monetary compensation in the public sector (see Abner et al. 2017; Boyd et al. 2018; Chen and Hsieh 2015, among others) to confirm how CEO monetary compensation impacts the relationship between integrity and public enterprise performance. In the public sector, the extrinsic motivation of higher CEO monetary compensation relative to other public enterprises generally crowds out prosocial motivation, which, in turn, impairs the relationship between external integrity and public enterprise performance. At the same time, higher CEO monetary compensation has an incremental impact on internal integrity in association with financial management performance. Thus, we suggest that public enterprises should pay close attention to the design of their current incentive systems for CEOs, place greater weight on prosocial motivation to manage external integrity, and emphasize skill-based monetary compensation to manage internal integrity. Lastly, using manually collected data sets of public enterprises provided by two independent government organizations in Korea, we increase the objectivity and generalizability of the findings of the few studies published on public service organizations in a single-country setting. Keywords: Integrity, Accountability, Efficiency, Performance evaluation, Public enterprises GLOBAL BUSINESS & FINANCE REVIEW, Volume. 28 Issue. 3 (JUNE 2023) 15-34 16 I. Introduction Integrity is defined as a condition in which individuals and organizations "hold multiple realms of judgment in tension while keeping coherence in their actions and lives" (Dobel 1990, p. 355); it is systemized norms accepted by an organization and its stakeholders in the realm of corporate behaviors, processes, and procedures related to accountability to authoritative criteria (Huberts 2018; Montefiore and Vines 2005; Van der Wal et al. 2008). In this study, we view integrity as a quality of corporate governance critical to address public interests in light of two values of integrity: incorruptibility and transparency, and posit a symbiotic relationship between integrity and the performance of public enterprises by examining the perceived integrity of public service users and public enterprise employees in connection with public enterprise performance. Additionally, we examine the systematic influence of monetary compensation for CEOs on the relationship between integrity and public enterprise performance. Public enterprises are funded by the government to promote the public good. They are given exclusive rights and privileges to operate specialized businesses for the benefit of public service users and the majority shareholders (i.e., the government). Therefore, public enterprises are exposed to a complex array of organizational goals that are subject to both accountability and efficiency. Accountability is rooted in values such as citizenship, impartiality, and equality, whereas efficiency is based on market norms including competition, consumerism, partnership, and managerialism (Denhardt and Denhardt 2000; Haque 1999). Following the proposition of New Public Management (NPM), public enterprises today focus on public accountability, seeing citizens as "customers" as in for-profit organizations and revamping public services to be more "businesslike" by improving operating efficiency (Brickley et al. 1995; Dobel 1990; Ferlie 2017; Heinrich 2002; Huberts 2018; Ittner and Larcker 2001; Otley 1999; Verbeeten 2008). In accordance with the NPM approach, the government of South Korea collects, evaluates, and disseminates the results of integrity assessments of public enterprises independently from public enterprises. Integrity plays an important role in the allocation of resources to improve accountability and efficiency goals of public enterprises in performance assessments, and the influence of monetary incentives on public enterprise employees have an important influence on the relationship between integrity and performance. By investigating the relationship between integrity and public enterprise performance, we explore how incorruptibility and transparency, dependent on public service users and public enterprise employees' perceptions, are associated with accountability and the efficiency of public enterprises performance. We further examine whether monetary compensation for public enterprise CEO influences the relationship between integrity and public enterprise performance because CEO monetary compensation has been a controversial issue in prior literature due to its mixed impact on organizational performance (Abner et al., 2017; Bushman and Smith, 2001; Bebchuk and Fried 2003, 2006; Kim et al., 2018; Luo and Jackson, 2012; Sharma, 2005) On the one hand, we expect that CEO monetary compensation motivates public enterprise employees, specifically CEOs, to enhance their selfefficacy based on efficient compensation contracting, which, in turn, has a positive impact on organizational performance. Otherwise, CEO monetary compensation can be used as a means of rent-seeking by public enterprise CEOs given their bureaucratic backgrounds as ex-officio members of other public organizations, which then crowds out their prosocial motivation and deteriorates organizational performance. Therefore, it is an empirical question whether integrity influences the performance of public enterprises, and how public enterprise CEO compensation plays a role in the relationship between the integrity and performance of public enterprises. Figure 1 depicts the conceptual framework for our study that describes how integrity is related to performance using Korean data on public enterprises from 2014 to 2017. Integrity consists of the collective perception of public service users (external integrity) Moon-Kyung Cho, Ho-Young Lee, Inkyung Yoon 17 and public enterprise employees (internal integrity); these two types of integrity are combined in a construct that we call comprehensive integrity, which affects the accountability and efficiency of public enterprises. CEO monetary compensation is an extrinsic motivating mechanism that influences the relationship between integrity and public enterprise performance. This study makes notable contributions in several ways. First, our paper captures integrity as assessed by diverse stakeholders with differing perspectives and levels of honesty and transparency that influence public enterprise performance assessments. Second, we extend the findings of prior studies on the impact of monetary compensation in the public sector (see Abner et al. 2017; Boyd et al. 2018; Chen and Hsieh 2015, among others) to confirm how CEO monetary compensation impacts the relationship between integrity and public enterprise performance. In the public sector, the extrinsic motivation of higher CEO monetary compensation relative to other public enterprises generally crowds out prosocial motivation, which, in turn, impairs the relationship between external integrity and public enterprise performance. At the same time, higher CEO monetary compensation has an incremental impact on internal integrity in association with financial management performance. Thus, we suggest that public enterprises should pay close attention to the design of their current incentive systems for CEOs, place greater weight on prosocial motivation to manage external integrity, and emphasize skill-based monetary compensation to manage internal integrity. Lastly, by using manually collected data sets of public enterprises provided by two independent government organizations in Korea, we increase the objectivity and generalizability of the findings of the few studies (Boyd et al. 2018; Chen and Hsieh 2015; Ekmekci 2011; Qing et al. 2020) published on public service organizations in a single-country setting. This paper is organized as follows. The next section provides a literature review and develops hypotheses; it is followed by a description of the research design. Then, we provide the results of our empirical analyses. Lastly, we describe the limitations of this study and provide suggestions for future research. II. Previous Literature and Hypothesis Development Several prior studies examined how integrity enhances managerial efficiency and labor productivity in both public-operated enterprises and state-owned enterprises (Ekmekci 2011; Mowday et al. 1979; Qing et al. 2020). For example, Qing et al. (2020) found positive relationships between ethical leadership, employee attitudes and psychological empowerment using a sample of public sector firms in China. Moreover, they found that psychological empowerment enhances the relationship between ethical leadership and employee commitment. Other research found that engaging in ethical business practices has a positive impact on firm reliability and corporate image and leads to greater job commitment and better individual performance of employees (Hodgkinson et al. 2018; Jung and Rainey 2011). Perceptions of the integrity of public enterprises can be evaluated from different perspectives by service users and public enterprise employees. Thus, investigating these perceptions separately in association with public enterprise performance may provide useful insights to practitioners and policy makers. According to the Anti-Corruption & Civil Rights Commission of Korea (ACRC, hereafter), external integrity is based on public service users' direct experiences of corruption in association with public enterprise performance. The unique aspect of external integrity is that it captures not only the perceptions of public service users in light of detailed potential Figure 1. Integrity and public enterprise performance GLOBAL BUSINESS & FINANCE REVIEW, Volume. 28 Issue. 3 (JUNE 2023) 15-34 18 corruption incidents but also directly asks for any preferential treatment requests, undue influences, illicit solicitations, pay-to-play experiences, entertainment requests, or abuses of authority. External integrity reflects the quality of corporate governance based on incorruptibility according to public service users' perceptions of corruption and public enterprises' anti-corruption policies. Prior studies suggest that corruption is related to the actual practice of corruption (Shleifer and Vishny 1993; Everett et al. 2007) as well as perceived extent of corruption believed in a society (Malagueño et al. 2010; Houqe and Monem 2016). For instance, Goel and Nelson (1998) investigated convicted cases of politicians for abusing their political power. In addition, several studies measure the quality of corporate governance based on laws and regulations, control of corruptions, and government effectiveness (Aidt 2009; Sáenz et al. 2014; Francis et al. 2016). If external integrity reflects the collective perceptions of public service users that a given public enterprise's anticorruption policy is operating effectively as designed, and that it, therefore, experiences less corruption, external integrity would be high in this scenario. It also implies that external integrity is linked to public enterprises' strategic goals of enhancing organizational performance if the effect of corruption is appropriately controlled by anti-corruption policies, which, in turn, leads to a positive association between external integrity and overall management performance. In a similar vein, internal integrity is related to employees' engagement as the core factor of improving organizational performance (Harter et al. 2002). Internal integrity reflects public enterprises' transparency in the work environment, anti-corruption policies, human resources, and budget management (ACRC, 2017). Organizational transparency has several advantages. First, it brings greater autonomy to government employees in controlling their work environment (Tangirala and Ramanujam 2008; Venkataramani and Tangirala 2010; Walumbwa and Schaubroeck 2009; Walumbwa et al. 2012). Second, employees are more likely to be receptive to other employees' inputs, pay closer attention to issues raised by their colleagues, and fosters openness to different ideas and suggestions, which, creates an improvementcentered voice within the organization (Brown and Treviño 2006; Treviño et al. 2003). An improvementcentered voice is especially critical in public enterprises because public enterprise employees' experiences of corruption (i.e., the misuse of public resources, embezzlement, bribery, or the mistreatment of certain groups) has a direct influence on public trust (Hassan 2015). When public enterprise employees become a powerful factor with an improvement-centered voice, organizational performance improves (Detert et al. 2013; Edmondson 2003; Hassan 2015). Prior research found that engaging in ethical business practices has a positive impact on firm reliability and corporate image and leads to greater job commitment and a better individual performance of employees (Hodgkinson et al. 2018; Jung and Rainey 2011). If external integrity is linked to public enterprises' strategic goals of enhancing organizational performance according to the proposition of NPM, we expect a positive association between external integrity and comprehensive performance. In a similar vein, if internal integrity based on the value of transparency, increases labor productivity and job commitment through public enterprise employees' intrinsic motivation, it would lead to better organizational performance overall (Chen and Hsieh 2015; Mowday et al. 2013). Taken together, if a public enterprise has high external and internal integrity, it will have enhanced organizational performance. Hence, we present the following hypotheses: H1. There is a positive association between comprehensive integrity and overall management performance. H1-1. There is a positive association between external integrity and overall management performance. H1-2. There is a positive association between internal integrity and overall management performance. Moon-Kyung Cho, Ho-Young Lee, Inkyung Yoon 19 In the next set of hypotheses, we examine how CEO monetary compensation influences the relationship between integrity and public enterprise performance. CEO monetary compensation has a mixed impact (Hu and Xu, 2022; Smith and Watts, 1992; Wright 1992) on both individual and organizational performance. It can motivate public employees (including CEOs) to enhance their self-efficacy and efficient contracting and has a positive impact on organizational performance overall. On one hand, CEO monetary compensation is an effective self-regulatory mechanism that increases individual effort (Bandura 1991; Lee et al. 1997). When monetary incentives are provided to CEOs with greater self-efficacy, their efforts towards strategy development are likely to increase organizational performance (Wright 1990, 1992). Ades and Tella (1996) state that greater monetary compensation for public employees (including CEOs) is likely to reduce corruption as long as similar incentives and remuneration are provided to public employees as to employees in the private sector. Thus, in the presence of ethical leadership motivating self-efficacy, CEO monetary compensation may play a positive role in enhancing an integrity-oriented organizational culture, which will not only enhance public enterprise employees' performance but also organizational performance overall. On the other hand, CEO monetary compensation may be used as a means of securing rent-seeking of public enterprise CEOs, which, in turn, can crowd out their prosocial motivation. Although monetary incentives are frequently employed to motivate employees, including CEOs, a heavy reliance on monetary incentives may crowd out prosocial motivation in the public sector (Walton 2012). In particular, providing higher monetary compensation to public enterprise CEOs compared to their peers at other public enterprises may result in a trade-off between private benefits and the ethical/moral beliefs needed to serve the public. Notably, motivation crowding theory views monetary incentives as an undesirable mechanism in the public sector because the focus of the public sector is on the prosocial values of their public service work rather than on pursuing extrinsic values (Frey and Jegen 2001; Abner et al. 2017; Chen and Hsieh 2015; Frey and Oberholzer-Gee 1997; Hodgkinson et al. 2018; Kroll and Porumbescu 2019). Thus, if public enterprise CEOs' monetary compensation is too high, it may crowd out their prosocial motivations, and as a result, impact other public service employees to focus more on increasing their individual wealth (Eisenhardt 1989; Kroll and Porumbescu 2019; Papenfuß and Keppeler 2020). As argued above, CEO compensation has a mixed connotation in the relationship between integrity and organizational performance. Thus, we propose the following null hypotheses. H2. Higher CEO compensation in public enterprises compared to peers has no impact on the relationship between comprehensive integrity and overall management performance. H2-1. Higher CEO compensation in public enterprises compared to peers has no impact on the relationship between external integrity and overall management performance. H2-2. Higher CEO compensation in public enterprises compared to peers has no impact on the relationship between internal integrity and overall management performance. III. Research Design and Data A. Data and Sample Selection According to the Act on the Management of Public Institution (Enterprise) Article 4 Public Institution (Enterprise), public enterprises in South Korea are classified as publicly operated enterprises (market type and semi-market type), state-owned enterprises (fund-management type and commissioned-services type), and specially incorporated enterprises (public enterprises that are neither publicly operated nor state-owned enterprises). In general, public enterprises have autonomy from the Korean government in their GLOBAL BUSINESS & FINANCE REVIEW, Volume. 28 Issue. 3 (JUNE 2023) 15-34 20 operations and respective revenue models. The relationship among integrity, performance, public enterprise CEO compensation, and the characteristics of public enterprises vary depending on the roles and responsibilities that public enterprises are assigned by the Korean government. In this study, we use data from both publicly operated and state-owned enterprises to examine these relationships. In particular, we used three sources of data on public enterprises: performance evaluations, CEO compensation disclosures, and integrity assessments. There are several noteworthy aspects of these evaluations. First, they focus on procedural validity to meet future-oriented organizational objectives from the viewpoints of various public service stakeholders. Second, they focus on the implementation of marketdriven competition as a means of improving public enterprise operations (Ahn et al. 2010; Lebas 1995). 1) Lastly, we use data supplied by two independent Korean organizations that publicly disclose information on public enterprise evaluations and integrity assessments at different times throughout the respective years. Performance evaluations and CEO compensation disclosures are publicly shared by the Ministry of Strategy and Finance (MOSF) in the third quarter of the next year, whereas integrity assessments are publicly disclosed by the ACRC at the end of each calendar year. Therefore, it mitigates a potential priming effect on the relationship between integrity and business performance. The annual public enterprise performance evaluation conducted by the MOSF involves approximately 100 civilian experts in respective industries/fields, including professors and accountants. The MOSF provides evaluation principles and standards in the evaluation handbook. The results of public enterprise performance evaluations are disclosed every year via the Public Information Disclosure System in Korea, also known as the All 1) Article 48 of the Act on the Management of Public Enterprises (Firm Performance Evaluation) entails the following: 1) the Deputy Prime Minister and Minister of Strategy and Finance evaluate the performance of public enterprises in accordance with Articles 31-(3) and 31-(4) in relation to compliance with contacts and Article 46, which relates to the mission and performance reports of public enterprises. Public Information In-One (Alio). 2) We present an example of public enterprise performance evaluation results from the Korea Gas Corporation (KOGAS) in Appendix 1. CEO compensation is publicly disclosed every year under the mandatory disclosure regulations in Korea. CEO compensation consists of six factors: base pay, fixed allowance, performance allowance, employee benefits, miscellaneous performance-related bonuses, and performance for pay. Public enterprise CEO compensation pertaining to performance for pay is directly tied to public enterprise performance that is evaluated and paid in the next fiscal year. Subsequently, the ACRC conducts surveys of the perception of integrity of these enterprises and records the number of corruption incidents to create perception indices for external, internal, and overall integrity to reduce the occurrence of corruption in susceptible public enterprises 3) . Integrity is measured as a weighted average of the combined scores for external integrity and internal integrity after deducting corruption scores taken from the corruption database. 4) External integrity is a combined score of the corruption index and corruption risk index, reflecting the integrity perceptions of public service users based on their direct experiences of specific public services. The external integrity survey is conducted via phone, and citizens who recently used public services are randomly selected by the respective public enterprise using a Computer Aided Telephone Interview (CATI) system. The CATI manages the names and contacts of public citizens in the database, selects samples, and assigns contact information for calling the selected center personnel (ACRC, 2016). Once public service users are selected, they respond to survey questions related 2) See http://www.alio.go.kr/alioIntroduce.do. 3) Public enterprise employees are not technically classified as civil servants, but they are still required to abide by the Public Servant Ethics Act and are subject to punishments under the Criminal Act (Articles 129-132) for giving or receiving bribes. 4) The corruption database maintains comprehensive, detailed information on cases of corruption occurring in public enterprises, including the amount of money involved, practices, patterns, and systems. The impact of each corruption incident on public enterprises is assessed by experts and translated into corruption scores. Moon-Kyung Cho, Ho-Young Lee, Inkyung Yoon 21 to their experiences and perceptions regarding recently used public services with regard to incorruptibility. When the external integrity score is high, the organization has low corruption as assessed by external public enterprise users. External integrity is the sum of the corruption index and the corruption risk index, which are based on the survey questions after deducting corruption conviction cases. Internal integrity consists of the perceived integrity culture index and the work integrity index, scores for which may be obtained from a survey completed by public enterprise employees using a Computer Aided Web Interview (CAWI) system. The CAWI system selects public employees for the survey based on their departments and rank (ACRC, 2016). The survey results offer in-depth information about the internal integrity of public enterprises, which is not apparent for public service users with respect to work environment transparency. Internal integrity assesses an organization's integrity-based system and the perception of public enterprise employees who have direct experience of the organization's integrity culture. Internal integrity consists of the integrity culture index (organizational culture, anti-corruption policy) and the business process transparency index (human resources management and budget management). More specifically, the business process transparency index includes questions in relation to both direct and indirect experiences of pay-to-play, entertainment, or preferential treatments through the improper use of organizational funds. Integrity is the sum of external integrity, internal integrity, and performance evaluations by a relevant organization after deducting penalty scores for improper/disciplinary actions. The policy customer evaluation, which refers to the evaluation performed by external experts and related stakeholders of public enterprises, such as government-linked firms, based on their perceptions and experience of corruption-related issues, is weighted at 14.9%. These evaluations determine the integrity for certain types of public enterprises and cannot be generalized to all public enterprises in this study; therefore, we did not examine policy customer evaluation separately. We limit our sample period to 2014-2017 because CEO compensation data was not available prior to 2014, and the classification of integrity assessment data was changed from a points-based system to a letter-grade system starting from 2018. Based on public enterprise performance evaluations and integrity assessment data from 2014 to 2017, we utilize a total of 241 firm-year observations, comprising 112 publicly operated and 129 state-owned enterprises. We exclude one observation lacking employee information and six additional observations lacking the necessary financial information for control variables. The final sample, thus, consists of 234 firm-year observations, as shown in panel A of Table 1. Panel B of Table 1 presents the distribution of the number of public enterprises by year. The observations range from 49 to 77 per year, which increased from 49 to 59 between 2015 and 2016, and from 59 to 77 between 2016 and 2017, due to an increase in the number of public enterprises subject to performance evaluations in 2016 and 2017. Panel A. Sample Selection Procedure Description Observations Publicly operated enterprises 112 State-owned enterprises 129 Total number of public enterprises for integrity measure and firm performance evaluations from 2014 to 2017 241 Less: Missing employee information 1 Less: Missing other financial information 6 Total number of public enterprises 234 Panel B. Sample Distribution by Year Year Number of Observations 2014 49 2015 49 2016 59 2017 77 Total Sample 234 Table 1. Sample selection and distribution by year GLOBAL BUSINESS & FINANCE REVIEW, Volume. 28 Issue. 3 (JUNE 2023) 15-34 22 B. Research Model To test our hypotheses, we use the following models: OP it = α+ β1 (CI/ EI/ II) it + β2 SIZE it + β3 LEV it + β4 ROA it + β5 LOSS it + β6 ASSET it + β7 CEOC it + ε it (1) OP it = α+ β1 CEOCD it × (CI/ EI/ II) it + β2 (CI/EI/II) it + β3 CEOCD it + β4 SIZE it + β5 LEV it + β6 ROA it + β7 LOSS it + β8 ASSET it + ε it (2) See the Appendix 2 for detailed definitions of variables. Model (1) examines how comprehensive integrity ( CI ) is associated with overall management performance ( OP ) in testing of H1. We subdivide our main independent variable, comprehensive integrity ( CI ), into external integrity ( EI ) and internal integrity ( II ) to examine differential integrity perceptions of public service users and public enterprise employees on OP in testing of H1-1 and H1-2, respectively. Subsequently, we examine the impact of CEO compensation ( CEOCD ) in association with CI and OP in testing of H2 using model (2). CEOCD is an indicator variable representing CEO annual compensation greater than the median annual compensation of CEOs of peer public enterprises in the sample, following Cremers and Grinstein (2014). Lastly, we examine how EI and II are associated with OP in testing of H2-1 and H2-2, respectively. We use the fixed effect model to control for omitted variables and time-invariant characteristics, as each public enterprise has different asset allocations and profit structures depending on its specialized area of business. 5) The dependent variable, OP , represents overall management performance, and the independent variable, CI , is comprehensive integrity. EI and II represent external integrity and internal integrity, respectively. The coefficient of CEOCD × CI shows 5) Based on the Hausman test (Hausman and Taylor 1981), we confirm that the fixed effect model is appropriate. For this model, we exclude time-invariant characteristics and report within R2 values. the mediating effect of higher CEO compensation than peers ( CEOCD ) on the relationship between CI and OP. An intuitive way to examine whether CEOCD explains prosocial motivation and selfefficacy of the CEO is to employ, as the benchmark CEO compensation, the median compensation in the peer group in year t. This benchmark group formation follows the protocol in Cremers and Grinstein (2014); thus, this variable is based on the median CEO compensation of all public enterprises in the sample. We identify benchmark CEO compensation as the median base pay after excluding performance pay from total CEO compensation. We exclude performance pay because this form of pay in public enterprises is determined and paid by the government in the next fiscal year. 6) We consider several control variables, SIZE, LEV, ROA, LOSS and ASSET to represent public enterpriselevel characteristics. SIZE is measured as the number of employees. 7) LEV is leverage, calculated as total liability divided by total assets, and ROA is the return on assets calculated as net income divided by total assets. LOSS is equal to 1 if an enterprise's net income is less than 0. ASSET is measured as the natural logarithm of total assets. SIZE, LEV, ROA, LOSS and ASSET control for direct and indirect effects of financial variables on performance. Public enterprise performance evaluations include both accountability (non-financial) and efficiency (financial) measures that collectively represent public enterprise performance; thus, we expect our performance measure ( OP ) to 6) Precise measurement of the effect of CEOCD on the relationship between CI and OP is not possible if we include performance pay as part of benchmarked peer group CEO compensation. 7) Following Hyun et al. (2022), we use the number of employees as a proxy for SIZE rather than total assets because the total assets of public enterprises are determined based on enterprisespecific characteristics and objectives driven by the Korean government. A majority of Korean public enterprises include usufruct as part of intangible assets, which does not necessarily represent resources that the respective public enterprise owns, or controls rather bestowed by the government depending on the mission of public enterprise. Thus, the number of employees rather than total assets may be a better proxy for the size of the public enterprises. According to an anonymous reviewer's suggestion, we also included total assets as a control variable in the analysis, and the result remains qualitatively the same. Moon-Kyung Cho, Ho-Young Lee, Inkyung Yoon 29 relationship between integrity and HR/financial management performance, being consistent with self-efficiency based on efficient contracting. We also find that higher CEO monetary compensation in relation to compensation among peers has a negative impact on the relationship between external integrity and performance in terms of accountability and efficiency, as proxied by human resources management performance and financial management performance, respectively. In contrast, higher CEO monetary compensation in relation to compensation among peers has a positive impact on the relationship between internal integrity and accountability and efficiency performance. V. Conclusion and Suggestions for Future Research Our study offers several recommendations to public service users, public enterprise practitioners, and policy makers. Our primary results imply that information users of public enterprise performance need to be aware of the subjectivity of perceptions of integrity depending on the stakeholders (public service users or public enterprise employees) in interpreting information related to public enterprise performance. Further, we confirm the existence of the dilemma of offering monetary incentives based on the premise of NPM in the context of public enterprises. Monetary incentives may certainly be effective to enhance performance (see Abner et al. 2017; Boyd et al. 2018; Chen and Hsieh 2015, among others). However, the mixed findings of our study regarding monetary compensation to CEOs in the relationship between integrity and performance indicate that close attention should be paid to current incentive systems in public enterprises, especially those for CEOs; greater weight should be placed on prosocial motivation to ensure external integrity while providing direct links to skill-based monetary incentives to ensure internal integrity. Lastly, this study augments the objectivity and generalizability of previously obtained empirical evidence on public enterprise performance using various data sets supplied by two independent government organizations in Korea (the ACRC and MOSF). Collaboration between government organizations may reveal insights into the relationship between public trust and public enterprise performance. The limitation of this study is the results cannot be generalized in public enterprise setting other than Korea. Furthermore, starting from 2018, the classification of integrity assessment data was changed from a point-based system to a grade system. The newly implemented letter-grade system does not disclose how points are converted to an equivalent grade from grade 1 to grade 5 (where grade 1 represents the highest level of integrity and grade 5 represents the lowest integrity), which disables assessments of differences in perceived integrity within the same grade group. Therefore, the association between integrity and public enterprise performance in future periods may identify additional insight by using the grade-based system. Future studies can explore the conditions under which monetary incentive systems for public enterprise employees influence the relationship between integrity and public enterprise performance. It would be interesting to examine the extent to which withinenterprise pay gaps between CEOs and their employees affect public enterprise incentive systems. This would provide additional insights into incentive systems, enabling them to be redesigned and communicated to information users of public enterprise performance reports. Acknowledgement We acknowledge valuable comments by Professor Thomas Schneider at Ryerson University, and the 2021 American Accounting Association Government and Nonprofit Section Midyear Virtual Meeting participants. GLOBAL BUSINESS & FINANCE REVIEW, Volume. 28 Issue. 3 (JUNE 2023) 15-34 30 Disclosure Statement There are no conflicts of interest to declare. 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As indicated in Table #1 below, the performance evaluation consists of qualitative and quantitative criteria that are both scored with weighted scores and letter grades. A higher weighted score means better performance; the letter grade 'A+' is the highest grade. For each public enterprise, we used the total scores based on both qualitative and quantitative evaluation. The score is the sum of the weighted scores and letter grades. The basis of letter grades is 'A+,' which is equivalent to 100 percent. The difference between letter grade 'A+' and 'A' is equivalent to a 5%-point deduction. In the case of the Korea Gas Corporation, as shown below, the total raw score was 35.053 out of 50 points for 2017. Overall Management Performance Category Weight Grade Weight Score 1. Strategy and social contribution (1) Strategic planning and corporate responsibility (2) Management innovation (3) Customer satisfaction (4) Information sharing and data opening (5) Information Disclosure (6) Policy objectives achievement 5 3 C B 2 1 1 6 1.966 0.773 0.834 5.390 2. Human resources and organization management 4 B 3. Human resources cost and benefit management (1) Employee Benefit Management (2) Human resources cost management (3) Labor relations 6 4 C B 33.000 4. Efficiency (1) Labor efficiency (2) Capital efficiency 2.5 2.5 0.500 0.787 5. Financial budget management and performance (1) Financial budget management (2) Financial structure improvement (3) Financial performance - Operating margin - Debt management - Long-term financial management plan 3 2 C C 2 1.5 1.5 1.253 1.050 0.300 Total Score 27 19.2 23 15.853 35.053 Note: Total raw scores of overall management performance differ by public service organizations. Therefore, we used standardized scores out of total 100 possible points for empirical analysis. The standardized score of KOGAS was 70.106. GLOBAL BUSINESS & FINANCE REVIEW, Volume. 28 Issue. 3 (JUNE 2023) 15-34 34 CI it:the natural logarithm of the sum of scores for external integrity, internal integrity, and evaluation of policy implementation points reflecting the perceptions of citizens, public officers, employees, experts in the field, and affiliated workers. Deducted from this are points for occurrences of corruption based on employees' discreditable acts in public enterprise i in year t. Discreditable acts refer to occurrences of corruption based on the corrupt public official disciplinary index applicable to government agency employees, the corruption case index applicable to political appointees of government agencies and executive/staff of public service-related organizations, and acts reducing assessment reliability including manipulation/inaccuracy of the list of respondents, requests for favorable responses, improper acts detected through on-site inspections; EI it:the natural logarithm of the external integrity score, which reflects the perceptions of citizens and public officers measured using the corruption index and corruption risk index. The corruption index measures direct and indirect experiences and perceptions of corruption (i.e., the offering of money, gifts, entertainment, or convenience, and other improper pursuit of private interests), and accounts for 0.638 points based on 13 questions from the survey. The corruption risk index measures transparency and accountability in performing duties, and accounts for 0.362 posts based on 4 questions from the survey of public enterprise i in year t; II it:the natural logarithm of the internal integrity score, which reflects the perceptions of public employees measured using the integrity culture index and work integrity index. The integrity culture index measures the prevalence of corrupt practices and effectiveness of anti-corruption systems, accounting for 0.433 points based on 9 questions from the survey. The work integrity index measures transparency and fairness in personnel management, budget expectations, and order by superiors, which account for 0.567 points based on 24 questions from the survey of public enterprise i in year t; OP it:the natural logarithm of the overall management performance score (with a total of 100 points) of public enterprise i in year t; PP it:the natural logarithm of the strategy and social contribution performance score (with a total of 100 points) of public enterprise i in year t; HP it:the natural logarithm of the HR and organization management score plus the HR cost and benefit management score (with a total of 100 points) of public enterprise i in year t; FP it:the natural logarithm of the efficiency score plus the financial budget management and performance score (with a total of 100 points) of public enterprise i in year t; CEOCD it:equals 1 if CEO annual compensation of public enterprise i in year t is higher than the median CEO annual compensation of its peer public enterprises in the sample, otherwise 0; SIZE it:the natural logarithm of the number of employees at public enterprise i in year t; LEV it:total liability divided by total assets of public enterprise i in year t; ROA it:net income divided by total assets of public enterprise i in year t; LOSS it:takes a value of 1 if public enterprise i's net income in year t is negative, otherwise 0; ASSET it:the natural logarithm of total assets of public enterprise i in year t; CEOC it: the natural logarithm of annual compensation of the CEO at public enterprise i in year t, per thousand KRW. Appendix 2. Variable definitions