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

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  • Luo, Jin-hui
  • Xiang, Yuangao
  • Zhu, Ruichao

Abstract

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.

Suggested Citation

  • Luo, Jin-hui & Xiang, Yuangao & Zhu, Ruichao, 2020. "When Are Pay Gaps Good or Bad for Firm Performance? Evidence from China," Management and Organization Review, Cambridge University Press, vol. 16(5), pages 1030-1056, December.
    • Handle: RePEc:cup:maorev:v:16:y:2020:i:5:p:1030-1056_9
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    Cited by:

    1. Dinara Alpysbayeva & Jozef Konings & Venkat Subramanian & Aigerim Yergabulova, 2022. "Wage dispersion and firm performance: evidence from Kazakhstan," Working Papers 2022/01, Nazarbayev University, Graduate School of Business.
    2. Pengcheng Tang & Xuan Liu & Yao Hong & Shuwang Yang, 2023. "Moving beyond economic criteria: Exploring the social impact of green innovation from the stakeholder management perspective," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(3), pages 1042-1052, May.

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