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

Feng Han, Kienpin Tee, Siyuan Hao and Rancen Xiong

Finance Research Letters, 2024, vol. 62, issue PA

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.

Keywords: CEO; Executive compensation; Pay inequity; Relative deprivation; Firm efficiency; Data envelopment analysis (DEA); Stochastic frontier analysis (SFA) (search for similar items in EconPapers)
JEL-codes: G34 J31 J33 L25 M12 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612324001673
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001673

DOI: 10.1016/j.frl.2024.105137

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().