Chinese Listed Companies Within The Executive Team Pay Differentials: Causes And Impact On Business Performance Empirical Analysis

Based on the fierce debate between the tournament theory and the fairness and cohesiveness theory, this paper examines the relationship between pay dispersion within top management team and firms' performance. Using the data from 122 Chinese listed companies during Year 2006-2007, this paper finds that pay differentials between CEO and the rest of the executives in the top management team are positively related to the firms' performance, which is in favor of the tournament theory. Thus this paper concludes that appropriately widening the pay differentials among top executives in Chinese listed companies can improve firm's performance.Furthermore, this paper is perhaps the first to explore and examine the possible determinants that cause the intra-TMT pay dispersion in a systematic framework. The predictions of possible determinants are grouped into three categories: firm internal factors (number of contestants, firm size, and firm growth), firm corporate governance factors (state shareholding, ownership concentration, and CEO duality), and external environmental factors (operating environment uncertainty, region). The results show that pay dispersions within top management team in Chinese listed companies are wider when firms are larger, fast-growing, have more contestants, have dispersed ownerships, exist CEO duality and operate in more developed eastern regions. However, the empirical results do not find a significant relationship between environmental uncertainty, state shareholding and intra-TMT pay dispersion.Based on the findings of this paper as well as the current pitfalls of top management compensation in Chinese listed companies, the last part of this paper proposes several policy recommendations for executive compensation practitioners, aiming at improving the effectiveness of top management incentive plans.