Human Capital, Governance Structure And Executive-Employee Compensation Gap For Listed Companies

Compensation management is one of the core content of corporate governance.Modern enterprise salary distribution system focuses on widening pay gap ofemployees among different levels, playing a key role of incentive compensation toachieve a better performance. In some listed companies in China, however, theabsence of owners induced insider control, the management got to set thecompensation and salary system, more seriously, the pay gap will cause the viciouscompetition of employees, damaging the company’s business. In recent years,continuous decline in share prices, high layoffs were in stunning contrast withsky-high executive compensations in some listed companies. Six ministries jointlyissued executive "salary limit policy” in2009, salary gap problem once againbecomes a hot topic. The unfairness of income distribution has attracted widespreadattention from all sectors of society, however, the study of the problem amongacademic circles at present have limitations on the following two aspects: first, theacademic study of pay gap focused more on the factors affecting pay gap amongexecutives, but there has been little study on the pay gap of executives and theordinary employees, which, also lacks representative conclusions; secondly, Humancapital is the source of corporation innovation, it plays a key role in the R&D,manufacture, sales and management of listed companies. And good governance forlisted companies formulates reasonable strategies, and guarantees efficientmanagement. These two aspects, especially human capital characteristics, did notreceive enough attention, and the selection of relevant variables is limited. At thesame time, pay gap factors study from the eastern, central and western regions and13industry listed companies are rare. In view of this, based on China’s listed companiesdata during the period of2005-2012, this study paid close attention to its humancapital, governance structure and executive-employee compensation gap, so as toprovide some basis on compensation setting.This paper discussed the relationship between human capital, the governancestructure of listed companies and executives-employee pay gap, from eastern, centraland western regions respectively. The results showed that: first, in human capitalvariables, for listed companies in eastern and central regions, executive team size,number of employees and pay gap were significantly positively related; For the western region, however, female ratio in executives is an important factor, and thehigher the ratio, the narrower the gap between executives-employee pay gap.Executives’ age and executive education background are positively related withexecutive-employee pay gap. Second, in governance structure variables, theexpansion of the board of directors and board of supervisors can help shrink the levelof compensation gap of listed companies in eastern and central parts. But theindependent director system in three areas did not help narrow the gap between thepay. The joining together of two position measurement of all three areas didn’t passthe significance test, i.e. the joining together of two position of listed companies inChina is not an important factor influencing the pay gap. Third, increasing theproportion of state-owned shares, executives shareholding can effectively narrow thegap of listed companies in certain parts, the top ten outstanding shareholder holdinghad different effect in different areas: pay gap is in significant negative correlation inthe east region, while in the central region, the pay gap is significantly positivelyrelated. Combining the empirical results of executives-employee pay gap above withthe actual situation of Chinese listed companies, conclusions can be made that: thegrowth of the executives could stimulate bigger interest groups, making a strongerimpact on remuneration of the board; Dissecting has played a significant role in thewhole compensation system; the expansion of board can integrate compensationinformation more effectively, avoiding manipulation by a few directors, thus curbexecutive-employee pay gap; deficiency exists in the system of independent directorsof listed companies in our country, the improvement of the independent directorsproportion does not guarantee to enhance the independence of the boardcompensation decisions; proportion of state-owned shares tends to be more fair inincome distribution, effectively restraining the enlargement of executive-employeepay gap; executives shareholding is an alternative of executives remuneration.This paper then divided listed companies in our country into13industries,respectively and discussed the relationship between human capital, governancestructure of listed companies and executive-employee pay gap. Results showed that:first, for characteristics of human capital, executives’ age is a major factor in pay gap.The number of executives, executive education background is an important factor inthe industry of manufacturing, which accounted for the largest amount of listedcompanies. In addition, executive education background is an important factor infinance, real estate, social services, communication and culture industry influencing the pay gap. It is worth noting that the variable of female executives proportion in thesenior management team, although it was not significant in some industries, but it issignificantly negative in manufacturing industry, the industry accounts for more than50%of all listed companies. It is also significant in popular industry like theinformation technology industry, financial&insurance industry. Female executivestend to value more about the employees’ work. Second, for governance structurecharacteristics, the board size is significant negative in industries like wholesale andretail trade, finance, insurance and cultural industry; for many industries, theindependent directors proportion and pay gap were positively correlated, that is to say,the higher the independent directors proportion, the larger its correspondingexecutive-employee pay gap gets larger. Third, company’s performance representedby return on assets (ROA) was the domain factor influencing executive-employee paygap; proportion of state-owned shares in almost all industries showed significantnegative correlation with the pay gap. In addition, with total assets representingcompany size, the greater size, the larger the executive-employee pay gap.Based on the empirical research results above, to rationalize executive-employeepay gap, following measures should be taken: concise executive team, weakening itsinfluence on the board; specifying the dissection of the pay system and preventexecutives exploiting it to its own interest; increasing female executives’ influence onnarrowing the pay gap between executives and employees; further improve thecorporate governance mechanism, strengthen the board independence, enhancingsupervisory function of independent directors. This thesis focused on human capital,governance structure of listed companies and executive-employee pay gap in regionallevel and industry level, respectively. This can not only promote the development ofcompany compensation theory, and it can also be effective in the compensationdesign of listed companies and staff management in practice.