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Does unfairness reduce efficiency? Within-industry CEO pay inequity and firm efficiency in China

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  • Han, Feng
  • Tee, Kienpin
  • Hao, Siyuan
  • Xiong, Rancen

Abstract

This paper investigates the impact of CEO pay inequity within an industry on firm efficiency. We measure within-industry pay inequity as the difference in compensation between a firm's CEO and the second-highest-paid CEO in the same industry (or in the same size-industry group). Using R&D expenses and capital expenditures as the inputs, we construct data envelopment analysis (DEA) and stochastic frontier analysis (SFA) scores to evaluate firm efficiency. We find that within-industry CEO pay inequity is negatively associated with firm efficiency. We further show a significantly negative impact of within-industry CEO pay inequity on firm performance (ROA and Tobin's q). Overall, our findings highlight the destructive effect of CEO pay inequity within an industry which dampens executive motivation and leads to reduced firm efficiency, supporting relative deprivation theory and equity theory, the two major theories of perceived distributive injustice.

Suggested Citation

  • Han, Feng & Tee, Kienpin & Hao, Siyuan & Xiong, Rancen, 2024. "Does unfairness reduce efficiency? Within-industry CEO pay inequity and firm efficiency in China," Finance Research Letters, Elsevier, vol. 62(PA).
    • Handle: RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001673
    DOI: 10.1016/j.frl.2024.105137
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    Cited by:

    1. Yun Liao, 2024. "Super-efficiency and Stock Market Valuation: Evidence from Listed Banks in China (2006 to 2023)," Papers 2407.14734, arXiv.org.

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    More about this item

    Keywords

    CEO; Executive compensation; Pay inequity; Relative deprivation; Firm efficiency; Data envelopment analysis (DEA); Stochastic frontier analysis (SFA);
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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