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| Board Faultlines and the Firm Pay Gap |
| XU Canyu, LI Xuanbo, LIANG Shangkun
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School of Business, East China University of Science and Technology;
School of Accountancy, Singapore Management University;
School of Accountancy, Central University of Finance and Economics |
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Abstract The pay gap between corporate executives and ordinary employees is related to both the company's performance and the fairness and stability of social distribution.Government departments have promulgated a series of policies and regulations to limit the pay gap. However, these salary-limiting policies have mainly been imposed by external regulatory forces, and their implementation has not been uniform; in addition, these policies have had a limited effect on non-state-owned enterprises. In this context, the internal governance perspective suggests that it is necessary to study the issue of executive salaries from the ground up, which is also instructive for understanding the pay gap in different companies.
The board of directors is the core of a company's internal governance. Exploring the factors influencing the board's supervisory function will clarify the causes and consequences of the pay gap. Unlike the literature focusing on individual characteristics, our study is based on faultline theory. With the extension of the company's operating time, the board of directors may form different small groups. Small groups have different profit-seeking motives, and differ in management concepts, methods, and awareness, which makes it difficult for the board of directors to perform its supervisory function effectively. The phenomenon of multiple small groups within the board of directors is called “board faultlines”. Such faultlines are common and have a serious impact on its functioning. Accordingly, we explore whether the existence of small groups within the board of directors affects its supervisory function and the firm pay gap.
Based on data from a sample of Chinese A-share listed companies from 2005 to 2019, we examine how board faultlines affect the firm pay gap. Our findings suggest that (1) board faultlines significantly promote the pay gap; (2) board faultlines based on deep-level attributes have stronger and more persistent effects on the pay gap; (3) a high degree of industry competition alleviates this positive relationship;(4) the impact of board faultlines on the pay gap leads to lower firm performance.
Our study makes three contributions to the literature. First, we enrich research on pay gap governance from the perspective of board faultlines. We find that the harm to the board's supervisory function caused by board faultlines is a source of executive power. Therefore, attempts to address the pay gap should examine the formation of board faultlines. Our study thus provides a new direction for pay gap governance research and practice.
Second, we contribute to research on the measurement and economic consequences of board faultlines. We consider eight director characteristics and optimize the measure, overcoming the limitation of the number of subgroups and making the measure more accurate. In terms of economic consequences, studies typically focus on corporate performance, value, and cross-border mergers and acquisitions.Our study discusses the impact of board faultlines on the board's supervision and the firm pay gap, which constitutes a useful supplement to the literature.
Third, our findings have practical significance for improving the company's salary incentive mechanism and board supervision. We find that the pay gap does not have an incentive effect, and even has a negative impact on corporate performance. Therefore, the company should pay attention to the reasonable combination of director characteristics when choosing directors. It is important to prevent the formation of faultlines while achieving diversification of the board of directors, to emphasize the board's overall goal, and to alleviate the harm of identity with a subgroup. These measures will improve board supervision and compensation incentives.
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Received: 31 January 2019
Published: 02 August 2021
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