Pay Gap and Performance in China

31 Pages Posted: 9 Sep 2016

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Danlu Bu

Southwestern University of Finance and Economics (SWUFE) - School of Business Administration

Mihir N. Mehta

University of Michigan at Ann Arbor

Date Written: September 2016

Abstract

The growing gap between the pay of executives and employees has been the subject of much media publicity and political attention in recent times. We analyze the pay gap between executives and employees, focusing on three components: executive pay premium relative to industry peers; employee pay premium; and average pay gap at the industry level. We examine how the executive and employee pay premium components of the pay gap drive firm performance. On one hand, economic theories of matching and managerial talent suggest talented executives who generate relatively better firm performance receive wage premiums, implying a positive relation between pay gap and performance. On the other hand, sociological theories suggest that the inequity implied by a larger pay gap lowers firm performance by adversely affecting employee morale and productivity. To test these alternative theories, we utilize pay gap data from China that provides a setting with strong national preferences towards social equity but also with a scarcity of experienced managers and abundance of low‐cost labour. Our results strongly support the economic theories — firm performance is largely driven by pay premium for executive talent. Additional tests using a smaller sample of US firms with pay gap data are consistent with our primary findings. Our study is likely to be of interest to politicians, regulators, and company executives responsible for understanding and evaluating pay gap and executive pay.

Keywords: Accounting performance, Employee pay premium, Executive pay premium, Matching theory, Pay gap

Suggested Citation

Banker, Rajiv D. and Bu, Danlu and Mehta, Mihir N., Pay Gap and Performance in China (September 2016). Abacus, Vol. 52, Issue 3, pp. 501-531, 2016. Available at SSRN: https://ssrn.com/abstract=2836706 or http://dx.doi.org/10.1111/abac.12082

Rajiv D. Banker (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Danlu Bu

Southwestern University of Finance and Economics (SWUFE) - School of Business Administration ( email )

No.55 Guanghuacun Street
Chengdu, 610074
China

Mihir N. Mehta

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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