Top Management Pay Equality, Incentive Efficiency and Corporate Performance

Huang Zaisheng

Journal of Finance and Economics Vol. 42, Issue 05, pp. 88 - 98 (2016)  DOI:10.16538/j.cnki.jfe.2016.05.008

Abstract

There exists a unique phenomenon that board chairmen and general managers are paid equally in some Chinese listed companies. What is the base of the determination of top management pay equality? And does top management pay equality have incentive efficiency? How does top management pay equality affect corporate performance? Based on the data of A-share listed companies from 2007 to 2012, this paper empirically investigates top management pay equality and its economic consequences. It arrives at the conclusions that top management pay equality in some listed companies mainly arises from the fact that top management pay determinations in some listed companies are dominated by corporate politics or peer effects rather than the efficiency logic alluded by optimal contracting theory. Furthermore, compared with the counterparts in companies with top management pay inequality, the board chairmen' compensation contracts lack efficiency in companies with top management pay equality. As a result, this kind of equal pay practice is negatively associated with firm accounting performance. In sum, these findings suggest that, in Chinese context, more attention should be given to the interfering effects of non-economic factors such as corporate power struggle and internal pay comparison when designing and implementing top management pay contracts.

Keywords

top management pay equality; individual characteristic; corporate politics; peer effect; propensity score analysis