Twentieth International Conference on Environmental, Cultural, Economic & Social Sustainability

Abstract

Financial theory on the subject of compensation gap between executives and employees presents a dilemma. On one hand, the theory suggests that the compensation gap create an incentive for the employees to perform and it would lead to a higher level of financial performance. On the other hand, it has been argued that the compensation gap based, often based on managerial power would have a negative impact on the firm’s financial performance. In this paper, we analyze the compensation gap based on managerial competence and based on managerial power. Using data of relatively large number of Chinese corporations, we analyze the economic impact of the compensation gap between the executives and employees on the operational (accounting) and market-based performances of Chinese corporations. Our results suggest that the compensation gap, based on managerial competence, has a positive impact on the firm’s financial performance while the compensation pay gap, based on managerial power, has a negative effect on firm’s financial performance. Our results also suggest that impact of the compensation gap on operational performance is more significant in private sector comparing to public sector. Finally, our results suggest that the market-based performance is more sensitive to the compensation gap among state-owned firms.