Does Horizontal Pay Gap Encourage Non-CEO Executives?

At the present moment of steady development of transition economy,"to make the incentive to be right" has become a power source to boost the vitality of the development of economy under the new normal.The top management team as the core competitiveness of an enterprise,the fairness and rationality of compensation distribution of the top management team can help enterprises to continuously achieve each "small goal" of value creation in the development path.Existing literature focus mostly on the vertical pay gap(the pay gap between CEO and non-CEO executives),concentrates on the important role of CEO in the team incentive,while little literature explored the incentive effects of the horizontal pay gap associated with non-CEO executives.In fact,the non-CEO executives of an enterprise are essentially at the same level,and their competence,power and status make them more comparable.Non-CEO executives have more incentive to pay attention to the fairness and rationality of compensation structure.In addition,executives are acting as a team to make decisions with the demand of interdependence and cooperation,so it is important to emphasize the integrity of a team(Kale et al.,2013).Non-CEO executives are an important part of the top management team with a large number,and effective incentives for non-CEO executives can mobilize their efforts to improve the overall efficiency of the whole team.Although the chairman and CEO of Chinese enterprises,especially state-owned enterprises,have the ultimate decision-making power,they may lack a comprehensive and detailed understanding of the content of most decisions,and non-CEO executives,who are the mainstay of an enterprise,have a better understanding of details of the formulation,implementation,supervision and management of plans,and more clearly to grasp the key links in the decision-making process.So,non-CEO executives can seriously influence the decision-making behavior of enterprises,and the effectiveness of compensation incentive for non-CEO executives is an important factor affecting the extent of their effort.Therefore,based on the premise that behavior of non-CEO executives can have an important impact on firm performance and investment,this paper believes that it is worthy to study the performance and investment incentive effectiveness of the horizontal pay gap between non-CEO executives in the top management team,and also to emphasize the important role of investment activities in operations.Using the sample of listed firms in China A share market from 2005-2014 and based on property right theory,this paper examines incentive effect of the horizontal pay gaps between non-CEO executives.The results show that in state-owned enterprises,the horizontal pay gap is negatively related to firm performance,investment and investment efficiency,while in private enterprises,we find no significant relations between the horizontal pay gap and these factors.Through path analysis,we find that higher horizontal pay gap in state-owned enterprises tends to discourage effective investments,thus leading to a lower performance.Moreover,managerial stockholding level could relieve the negative relationship between the horizontal pay gap and investment in state-owned enterprises.These results indicate that the increase of the horizontal pay gap arouse sense of unfairness among non-CEO executives,which deters executives from active investment decisions.Therefore,the passive managerial mode leads to the decrease of investment,investment efficiency,and firm performance.This research not only has some enlightenment in designing compensation structure of executives,but also enriches literatures in compensation inequity.