Research On Vertical Pay Gap Of Top Management Team And Corporate Violation Behavior:The Moderating Effect Of Firm’s Internal And External Environment

Top management team plays a key role in the corporate strategy decision-making process and corporate strategy implementation.However,due to the two rights separation management pattern of modern enterprise,the personal interests of executives and the interests of shareholders are not always consistent with each other,and there may even be serious conflicts between them,resulting in agency problems.Therefore,companies need to establish effective corporate governance mechanisms,which aim at fully mobilizing the working enthusiasm of executives,while avoiding the executives’ opportunistic behaviors driven by self-interested motives.More specifically,companies can use the ownership concentration and the system of board of directors to ensure strong supervision of executives,or take advantage of compensation system and other incentives to achieve the coordination of the interests of shareholders and executives.Many studies have shown that in the compensation incentive system of top managers,the role of executive pay gap in affecting individual behavior is more obvious than the absolute compensation level.Therefore,the pay gap design between different managerial levels is the most widely used executive incentive method in practice.Although behavioral theory points out the negative impact that the executive pay gap may have on individual behavior from the perspective of fairness and team coordination needs,most management practices still support the inference of tournament theory.Namely,the pay gap can significantly encourage executives to improve their effort level,which is helpful for corporate performance improvement and corporate value growth.However,the individual behavioral motivation is comprehensively reflected in the three aspects of effort intensity,effort direction and persistence of efforts.If we leave aside the effort level and further consider the direction of efforts emphased by the motivation theory,it’s hard to say that the strong promotion desire brought by the executive pay gap does necessarily lead to positive behavior of top managers.Whether positive effort consistent with organizational goals or negative effort that is contrary to organizational goals,they will be passed to organizational behavior through the discretionary power of executives.Based on the data set of A-share listed companies from 2006 to 2016,a mixed sample of 18,211 observations and a paired sample of 4,628 observations are constructed.This research uses the panel count model and the panel binary selection model to explore the impact of the vertical executive pay gap on corporate violations,which reveals the possible negative incentive effects of the tournament mechanism.The research results show that there is a significant positive correlation between the executive pay gap and the corporate violation behaviors.That is,under the condition of controlling other factors,the larger the vertical pay gap of top management team,the more corporate violations.The results show that although the expansion of the pay gap can encourage executives to improve their effort level,it will stimulate executives’ positive efforts and negative efforts simultaneously.Based on the main effect,this study examines the moderating effect of both the coporate internal environment and external environment.The external environmental uncertainty and the degree of industry competition affect the causal relationship between the individual efforts and corporate performance,thus weakening the relationship between executive pay gap and corporate violations.Further more,the results of group regression based on the corporate ownership nature show that the tendency of corporate violations brought by the excutive pay gap is more obvious in non-state-owned enterprises,but not significant in state-owned enterprises.This is mainly because the ownership nature affects the relationship between effort and performance and the relationship between performance and rewards,as well as the relationship between rewards and individual needs.In addition,this research examines the moderating effect of internal financial distress,believing that executives will reduce the tendency of violations when company is faced with financial distress,but this hypothesis is only partially supported in the robustness test.By theoretical analyses,this study integrates the tournament theory and the incentive theory,and discusses the logical relationship between the vertical pay gap of the top management team and the corporate violations,as well as the internal mechanism of the moderating effect of various situational factors.Then,a normative empirical analysis is conducted to test the research hypotheses proposed in the theoretical model.Furthermore,affirming the key role of top management team members in strategic decision-making,this research links the motives of executives’individual behavior with organizational behavior,and expandes the impact of compensation incentives from individual level to organizational level.The research results show that the vertical pay gap of top management team intensifies the self-interest motivation and risk-taking tendency of executives,increases the risk of unethical behavior of executives,thus leading to more corporate violations.Therefore,the research conclusions of this paper not only provide a useful supplement to the tournament theory,but also provide a new research perspective for the cause of organizational misconduct,and also enrich the research findings about the economic consequences of compensation incentives.Under the high power distance of Chinese enterprise management background,the executive pay gap is remarkably effective in stimulating individuals to improve their effort level.However,only the efforts consistent with organizational goals and shareholder values are in line with the original intention of the compensation system designers.Therefore,the research results has certain practical significance in the formulation of corporate compensation system,the selection of senior executives and the prevention of corporate violations.In addition,this study confirms that the root cause of corporate violations lies in top managers,which provides a new regulatory approach for government regulatory authorities.More specifically,increase the cost of executives’ opportunistic behavior through accountability mechanisms,so that executives can also undertake the consequences of corporate violations.