Fairness Preference, Intra-firm Compensation Inequity And Firm Performance

With the integration of Accounting, Economics, Finance and Social Psychology, more and more foreigner researchers have begun to research the model of compensation contract and reconsider firms' compensation strategy from fairness preference. However, The research in this area has been still at beginning stage in China. Therefore, based on the fairness theory and the relative deprivation theory which focus on the distributive justice preference, and the contract theory which focuses on the compensation contract design, the dissertation discusses the following questions: On the premise that people are characterized with fairness preference, how the intra-firm compensation inequity and firm members' fairness preference affect the firm performance?I design a CEO/ worker compensation contract model for a single agent and a top management team compensation contract model for multiple agents in the tournament mechanisms based on the firm members' fairness preference. Several propositions are derived from the models and corresponding theories: the stronger the firm members' fairness preference is, the lower the firm performance; and the firm performance reacts in a reverse U-shaped way to compensation gap in the firm. These propositions form the theoretical foundations for the following empirical studies, which examines the relationship between intra-firm compensation inequity and firm performance, as well as firm members' fairness preference and firm performance. The main innovations of this dissertation are as follows:1. Inter-firm compensation gap comparison is augmented into the existing model, and two compensation contract models are designed with the firm members' fairness preference. From the two models, I derive the proposition of negative relationship between firm members' fairness preference and firm's performance, which is verification to prior literature, and the proposition of a reverse U-shaped relationship between the firms' performance and intra-firm compensation gap, which gives a theoretical support to the prior empirical results.2. I construct the formula to measure the intra-firm compensation inequity. The formula evidences that only the compensation gap irrelevant with the firm members' input difference can stand for the compensation inequity. In order to improve the accuracy of compensation inequity computation, the factors reflecting firm members' input difference, are augmented and supplemented into the empirical model. Using Chinese listed companies' data, I also empirically test the positive correlation between firm performance and intra-firm compensation inequality in some certain extent.3. In order to resolve the difficulties in obtaining the data of firm members' fairness preference, I measure firm members' fairness preference from two dimensions: the nature of firm ultimate ownership and the location of the firm. Using Chinese listed companies' data, I also empirically examine the fact that strong firm members' fairness preference can mitigate performance motivating effect of the members' compensation level and intra-firm compensation inequity.