Empirical Study On The Relationship Between The Pay Gap And The Company Performance

The pay gap has attracted much attention from both academic world and the public since last century. It became a hot issue in the theoretical and practical field with various social problems in recent years. The world financial crisis broke out in 2008, many enterprises performance declined, but executive compensations did not slide, even some increased. Wall Street handed out $18.4 billion dollars to its executives at the same time. This certainly caused the attention from the public as to how pay gap and company performance determined each other. In a reformed free market, pay gap would be existed, but to what extent? Huge pay gap would negatively impact the performance of the company in a long run, because it would dramatically decrease the productivity of the participants. China is an enormous country. Different territories have their only uniqueness. Eastern coastal territories like Shanghai have developed for many decades. Their western counterparts, however, have not, due to geographical limitations and lacking of transportation infrastructures. Therefore, the central government rolled out the Western development initiatives to bridge the gap between East and West. Sichuan, located in southwest China, learned the play book from the East provinces, knew what it had to do to move forward, has developed tremendously. The tier one cities like Chengdu and Chongqing have moved leaps and bounds. The public companies in Sichuan have made their parts to contribute to the social developments. It provided decent amount of employments to the local society and tax revenue to the local governments. The amount of contributions by public companies were largely depended on their performances. When they made more money, they intended to hire more people and thus generated more tax revenue and vice versa. Generally speaking, it takes both management and employee to take the company forward, their stakes are bounded together. When companies make more money, so do management and employees. But their pays have to be in a reasonable range. When gap range is in a good structure, the companies deliver good results. And when the gap range is in a disfuntional structure, bad things could happen. Hence, the purpose of this paper is to determine the relationship of performance of the companies and their pay gap, we used listed public companies to draw the conclusions.The object of study in this paper is the relationship between the pay gap and the company performance. This paper adopts the method of empirical research to test the data of the listed companies in Sichuan province between 2010 to 2014 and draw conclusions. Meanwhile, this paper provides suggestions to public companies from a financial heath point of view.Based on Tournament Theory and Behavior Theory, this paper summarizes the former scholar's research methods and shortcomings, combined with the characteristics of the listed companies of Sichuan province to come to the preliminary research hypotheses. In the process of research, we defined two metrics. One is the pay gap among the executive management and the other is the pay gap between executive and employees. The study samples were selected from Sichuan-based companies that were listed on Shenzhen and Shanghai and by using the descriptive statistical analysis, correlation analysis, linear regression analysis to draw the findings. There are four major conclusions in this paper:1.The effect of pay gap among management as to the performance of the company is signific ant.,it turns out to be upright. 2. The pay gap between management and employees hugely i mpacts company and it turns out to be upright. 3. Among the State-Owned Enterprises, as th e companies were making more profits, the pay gap among managers was also getting wider.4.when companies weremaking more profits, the pay gap between managers and employees w idened,regardless they are state owned or non state-owned companies. Based on the research, we provide the following compensation suggestions to make companies more efficient:1. Create a more efficient company-wide structure2. The pay structure of the top management3. How the companies should be run and operated4. Become more transparent5. Performance-driven compensation PackageWe intend to address the problems facing the companies from different perspectives which make this paper so unique from its peers. 1. Considering the vastness of China, we only focused on Sichuan-based companies. Their performances and their pay structures relationships. In addition, we furnished our analysis and suggestions. 2. When we did our studies, we used historical data to get our findings. Historical data do not always predict what the future holds, but at least it gave us some patterns to recognize. If history is a guide, those data became more reliable. On a different note, we did not separate the companies by different sectors when we conducted the research. In addition, we only used companies provided public information; hence, there were information that were not taken into considerations.