Pay Gap Of Top Managements And Firm Value

As the decision-makers and direct agents of corporate, top managements generallycontrol the allocation of resources of the corporate and the importance of HR capacity isincreasingly high. Senior executives, who generally are rare, irreplaceable andhighly-valued, play a crucial role business development of corporate and are core strengthfor the corporate to maintain sustainable competitiveness. Due to close relationshipbetween the pricing of top managements and firm value, intense studies have beenconducted on pay allocation of top managements in local international academic circle.Currently, pay incentive is recognized as an effective solution for agent problem betweenshareholders and the executives. Pay gap among top managements is fundamentally thereallocation of pay resources, suggesting the degree of pay incentive. Relying on optimalcontract theory and pay gap theory, the correlation and mechanism between pay gap of topmanagements and firm value of private listed companies have been discussed withtournament theory and behavior theory under the special economic circumstance withChinese characteristics. Additionally, dynamic characteristics, influencing factors andincentive results of pay gap of senior executives of private listed companies were as wellanalyzed. The changing pattern of pay gap incentive of Senior executives of privatecompanies was concluded on basis of internal right optimization and optimal allocation ofprivate companies. This study would provide a sample, both empirically and theoretically,for management practice and using pay gap incentive of Chinese private companies.From the published studies on pay gap theories about how pay gap influence firmvalue, it can be concluded there are three patterns exist among different companies. Firstly,immense pay gap could increase firm value; secondly, significant pay gap demonstrates nogood for firm value; and thirdly, dynamic mechanism exit between pay gap and firm value:the firm value increases with the pay gap grow bigger while pay gap grows immensely thefirm value would decrease, suggesting pour U relationship. In China, companies are divided into two categories: state-owned companies and non-state-owned companiesaccording to the nature of property right and the companies differ greatly in terms of HRcapacity management, resource allocation, company operating, company governance andpay allocation, etc. As a result, the problem of relationship between pay gap and firm valueis definitely more complicated and special. Mechanism of how pay gap of topmanagements influence firm value was specially emphasized in this study so as toconstruct the pay gap incentive system proper exclusively for Chinese private companies.The major achievement of the study is that a model concerning how pay gap of seniorexecutives influence firm value was constructed using researching methods bothempirically and theoretically. Main conclusion conducted from the study include:(1) thepay level of top managements climbed significantly and the pay gap between differentindustries grew steadily. In contrast with the Middle and West area, pay gap is bigger inthe East and coast areas and same conclusion made in highly marketization.(2) Pay gap oftop managements of private companies could be influenced by both internal and externalfactors. Diverse measures such as increase of management staff and exaggeration of theirpower, growing of the competition for core positions and founding of pay committee willresult in positive effects on pay gap. And independent director system, somehow, couldprevent the growing pay gap of top managements while the ration of paying directors andsupervision committee generate insignificant influence on pay gap of Senior executives.On the contrary, too intensive shares and high-ration of shares by senior executives woulddecrease the pay gap.(3) The positive relationship observed between pay gap of seniorexecutives and firm companies testified that the tournament theory is more effective insupporting the hypotheses that senior executives would be motivated by pay gap. Fromfurther studies and additional tests, it was concluded that steadily linear relation withpositive slope exit between pay gap of executives and firm value. In details, pay gapgenerates far more influence on firm market value than that on firm financial value whilethe gap enlarges.(4) The managerial power of company governance was demonstratedpositively enhancing the incentive effects of pay gap. Meanwhile, with the increase ofmanagerial power of company governance, the relation between pay gap and firm financialvalue maintain the existing level while the relation between pay gap and firm market valuechanges significantly, in accordance with increasing moving pattern. Innovative conclusions made by the study can be listed as followings:(1) conductingdeep analysis: transferring traditional study on pay-performance to internal resourcesallocation and creatively proposed to enlarge pay gap and optimize power allocation toincrease firm value.(2) in terms of researching methods, economic analyzing tools, bothstatically and dynamically, were fully applied in forecasting the influence of pay gap onfirm value, which greatly enriched the researching ways in studying pay incentive system.(3) based on theoretic and empirical analysis, the study elaborately analyzed the influenceof pay gap on firm financial value and market value.(4) based on the conclusions made ofthe study, in addition to current situations of Chinese private companies, the authorproposed four measures on charging standards of pay gap and right allocation so as to fullyincreased the firm value by pay gap incentive system.Because of some objective factors such as shortage of measuring factors, samplecontent and limitedness of analyzing tools, the study still need further study on pay gap. Atthe end of the study, three suggestions have been proposed for further studies: firstly, oneof the urgent tasks for studying pay gap is to developing accurate method for measuringpay gap and fully analyzing pay gap in accordance with Lorenz curve and Gini coefficient.Secondly, an important priority for further study concerning pay gap is the attitude of staffresulted from different pattern and degree pay gap, particularly that on value of behavior.Last but not at least, emphasis should as well stressed on input of creating value same as onvalue output in terms of studies on firm value. In addition, the agency cost relationbetween enlarging of pay gap of executives and firm governance and shareholders shouldbe also studied elaborately in future.