Research On The Impact Of Executive Pay Equity On Corporate Performance

The fairness of executive pay issue affects not only the social perception of fairness, but also directly affects the managerial behavior and ultimately affects the company’s performance. Therefore, the executive pay equity measurement and its economic consequences become an urgent research topic. However, the current literature about executive pay equity has two aspects of limitations. First, the limitation on research perspectives. With the highlight of the conflict between equity and efficiency, more and more researchers are starting to focus on executive pay equity research. However, the current executive pay equity research mainly focus on the internal executive pay equity issues, the research on individual executive pay equity and external executive pay equity are still insufficient. Second, the monotonicity of research methodology. The majority of both home and abroad researchers did not make a clear distinguish between different level variables. Executives human capital characteristics at individual level, economic characteristics and corporate governance features at organizational level, and region, industry characteristics at market level were all put into the same level to do multiple regression analysis. The method of putting cross-level variables into a single-level may lead to leads to level fallacy bias.Based on the analysis of the previous research limitations, this dissertation intended to investigate executive pay equity from the perspective of the result equity. After defining the meaning of executive pay equity, the dissertation divided the executive pay equity into three dimensions, which is individual executive pay equity, internal executive pay equity and external executive pay equity. By applying the excess pay (also called residual pay) method to measure the inequity of executive pay, there were two improvements made. The first improvement was in research methodology. By reviewing the main literatures on factors affecting executive pay and pay gap, the dissertation divided the various factors into different levels. Based on the reasonable affecting factors of pay, pay gap and pay performance percentile, which were deducted from human capital theory, agency theory, social comparison theory and managers power theory, the dissertation adopts hierarchical linear model to construct separately the executive individul pay equity, internal pay equity, and external pay equity measurement models. Second, the previous researchers treated all the excess pay as a proxy for executive pay inequity. However, due to the fact that there are no universal determining model for executive pay, and there may be missing variables in the model, treating all excess pay as executive pay inequity might overestimate the extent of inequity, thus the dissertation adopted quartile method to divide the excess pay into different groups. Excess pay lying in the fourth quartile was named as positive excess pay, excess pay lying in the first quartile was named as negative excess pay, the excess pay lying in the middle was named as reasonable pay. Both of positive and negative excess pay represent the inequity of executive pay.After the constructing of executive pay measurement hierarchical linear model, the dissertation applied tournament theory, organizational justice theory, the relative deprivation theory, personnel selection theory to do the theoretical analysis and proposed relevant hypotheses. Taking the Chinese Shanghai and Shenzhen A-share listed company data and executive data during2007to2011as research sample, the dissertation used HLM to study the cross-level factors affecting individual executive pay equity, internal executive pay equity, and external executive pay equity. Using the residuals obtained from the HLM, the dissertation ran multiple regression analysis of the impact of different dimensions of executive pay equity on corporate performance. To avoid data endogenous and missing variables problems, the dissertation performed robust rest by using the lagged performance data, adding additional variable and regrouping. At last, the dissertation concluded the main conclusions, proposed related policy recommendations, and also pointed out the limitations of the research and the future research prospects.In general, the research comes to the following conclusions.First, factors from different levels have different explanation power in executive pay equity variance. Through cross-level analysis, the dissertation found that the human capital characteristics in individual level and the economic features in organizational level had almost equal explanation power in explaining the variances in individual pay equity. Two thirds of the variances in internal pay equity could be explained by the differences between market environments, ie the between-group variance. Only one third of the variances could be explained by the differences between companies, ie the within-group variance. Four fifths of the variances in external pay equity could be explained by the differences between companies, ie the within-group variance. Only one fifth of the variances could be explained by the differences between market environments, ie the between-group variance.Second, the ownership, nature of the industry have significant influence on the external executive pay equity. The Empirical results of hierarchical linear model indicate that compared with non-state-owned enterprises, central government controlled enterprises paid a high executive pay in the case of low performance, the company’s executives pay levels were high. However, compared with non-state-owned enterprises, the pay performance percentile ratio of local government controlled state-owned enterprises was not significantly different. Compared with non-monopoly enterprises, monopolies still paid a high executive pay in the case of low performance, the company’s executive pay levels were high.Third, the different dimensions of executive pay equity have different effects on corporate performance. The reasonable executive pay which represents individual executive pay equity has significant positive influence on corporate performance. It indicates that if the executive pay can reflect the ability and commitment the executive has, it will make executive feel pay equity, the satisfaction of pay will go up, thus result a positive impact on job performance. But the reasonable pay gap which represents the internal executive pay equity and the reasonable pay performance percentile ratio which represents the external executive pay equity have no significant impact on corporate performance. The individual executive pay equity regards comparing personal efforts and personal gains, which is easier to get approved by management. However, the internal executive pay equity and external pay equity focus on comparing the executives with other references, it is less likely to get approved by management. This may be the potential reason why different dimensions of executive pay equity have different effects on corporate performance.Fourth, as far as the internal pay equity is concerned, large pay gap may not be able to bring high performance, but small pay gap will inevitably affect corporate performance. The empirical results show that if the actual pay gap within the organization is below the reasonable gap, company performance will be significant negative affected. However, if the actual pay gap within the organization is larger than the reasonable pay gap, although the company performance will be positively affected, but not significantly. Since China has long been characterized by practicing egalitarianism pay system, the larger pay gap will bring the management incentive effect, thus resulting an increase in corporate performance, but due to the arising of inequity feeling inside the organization, the positive excess pay gap has no significant impact on corporate performance.Fifth, as far as the external pay equity is concerned, both the positive and the negative pay performance percentile ratio have significant impact on firm performance. Empirical results found that positive pay performance percentile ratio has a significant positive effect on corporate performance. This indicates that when a company’s pay performance percentile ratio is higher than reasonable pay performance percentile ratio, downside comparison allows managers to improve self-evaluation; the incentive may motivate mangers to improve management efficiency and push up the company performance. The research found that the negative pay performance percentile ratio also has a significant positive influence on corporate performance. The possible reason is that when management pay performance percentile ratio was significantly lower than the rivals, in order to avoid affecting their market value, the management will do more efforts to improve the performance of the company to change investors’ views of their abilities.The main contributions of the research are as follows.1. Based on social comparison theory, incentive theory, distribution justice theory, the dissertation defined the meaning and dimensions of’executive pay equity’, enriched and expanded the research area of incentive theory and principal-agent theory. After defining the definition of executive pay equity, the dissertation divided the executive pay equity into three dimensions, which is individual executive pay equity, internal executive pay equity and external executive pay equity. From the perspective of business entity, the dissertation discusses how to coordinate the reasonable relationship between the providers of production factors and the remuneration payment in the process of initial distribution. The research enriches the distribution results equity literature of micro-level, and expands the literature on incentive theory and principal-agent theory.2. Based on the analysis of nested variables, the dissertation constructed the hierarchical linear model to measure the executive pay equity. Comparing the various methods of measurement of pay equity, the research uses the excess pay method in empirical research to measure the various executive pay equity. Based on the analysis of nested variables, the dissertation used cross-level analysis to construct hierarchical linear model to measure different dimensions of executive pay equity. This methodology can effectively rectify the variance arising from regressing different level variables on the same level.3. By applying the’executive pay equity measurement model’, the research revealed the impact of executive pay equity on corporate performance and the implementation channel."Executive pay equity measurement model’provided an efficient tool to formulate "equity pay", based on the executive human capital characteristics, the economic features of the company, and the zone and industry where the company lies. By using the China listed company as sample, the dissertation applies the pay equity measurement model separately to study the impact of individual executive pay equity, internal executive pay equity and external executive pay equity on corporate performance. This will help the organizations to take proper actions to improve the results equity of the initial distribution, thus improve the organizational performance.