When Are Pay Gaps Good or Bad for Firm Performance? Evidence from China

There is still an ongoing debate regarding the firm performance implications of pay gaps between top executives and subordinate employees. This study integrates relative deprivation theory and tournament theory to investigate the potential nonlinear effects of pay gaps. We expect that at low levels...

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Bibliographic Details
Published in:Management and organization review 2020-12, Vol.16 (5), p.1030-1056
Main Authors: Luo, Jin-hui, Xiang, Yuangao, Zhu, Ruichao
Format: Article
Language:English
Subjects:
Compensation
Corporate culture
Egalitarianism
Employees
Executives
Hypotheses
Labor market
Relative deprivation
Wage differential
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Summary:There is still an ongoing debate regarding the firm performance implications of pay gaps between top executives and subordinate employees. This study integrates relative deprivation theory and tournament theory to investigate the potential nonlinear effects of pay gaps. We expect that at low levels of pay inequality, increased inequality hurts firm productivity, while at higher levels of pay inequality, increased inequality helps firm productivity. Our study of Chinese firms confirms that pay gaps have an approximately U-shaped relationship with firm performance. This nonlinear relationship is weaker in state-owned enterprises (SOEs) than in non-SOEs, suggesting that state ownership is an important moderator in the association. Overall, this study explains previous mixed findings regarding consequences of pay gaps with meaningful implications for policymakers and entrepreneurs in China and other economies with similar cultural and institutional backgrounds.
ISSN:1740-8776
1740-8784
DOI:10.1017/mor.2019.42