Internal Executive Pay Gap Is To Study The Impacts Of Risk To The Company

Principal-agent problem has always been an important topic in corporate governance. In order to solve this problem, entrepreneurs and academia designed a variety of motivational instruments for management staffs. Right now, stock incentives are not widely used in domestic companies. As a result, to implement a differentiated pay system in the management team is a feasible solution to the principal-agent problem. How to set up the pay gap between senior management team members has become an issue of common concern. With the growth and development of the Chinese stock market, many scholars have done in-depth research on the relationship between the pay gap among top executives and firm performance based on data of domestic listed companies, using two different theories-tournament theory and behavioral theory. A lot of empirical analysis has been done to verify the impact on firm performance caused by pay gaps. Whether the pay gap between senior executives of listed companies can promote the growth of firm performance has become the standard when judging the rationality of the pay gap. However, high growth and return are often accompanied by high risk. While considering the dimension of performance growth, how will the risks faced by the company change at the same time? Concern on the risk is particularly important when the economic environment is not so optimistic. As the pay gap increases, executives under ever-increasing incentives are likely to make decisions and take policies with more risk, thus to improve their performance in order to obtain promotions and increase of payment, and these actions may bring greater risk to the company. In addition, high pay gap may lead to feelings of injustice among management team members, breakage of their cooperation and increase of risk. We will focus on the impact on firm risk caused by pay gap between senior executives base on samples of domestic listed companies, and provide reference for payment design in listed companies.We collect data of488companies listed on Shanghai and Shenzhen Stock Exchange during year2002-2010, and make use of panel data analysis to investigate the relationship between pay gap among senior executives in listed companies and fluctuations in firm performance as well as stock price. Empirical results show that significant positive correlation does exist between pay gap and fluctuations in firm performance as well as stock price, which means that greater pay gap leads to greater risk. At the same time, we also do some tests to see if there would be any difference between state-owned and non state-owned enterprises as to the impact on corporate risk caused by pay gap among the management team. After controlling for firm characteristics, we find that state-owned enterprises enjoy lower level of risk comparing with non state-owned enterprises. Also, influence on corporate risk caused by pay gap among executives in state-owned enterprises is larger than that in non state-owned enterprises. In conclusion, we suggest that both firm performance and firm risk should be taken into consideration in the process of payment design, so as to set rational and advanced payment structure.