Does the compensation gap between executives and staffs influence future firm performance? The moderating roles of managerial power and overconfidence

When people become successful, due to cognitive errors, it is easy to attribute success to their own factors. Conversely, at the time of failure, they automatically ignore their own limitations and put the blame on external objective conditions such as fate and lack of opportunity. Fiske and Taylor [1991] in their study found that the “self-reinforce attribution” after victory is more common than the “self-protection attribution” after defeat, illustrating overconfidence as psychological bias, which is more likely to occur in the population.

At the time of performing a task, people tend to think that it can be manipulated by them, ignoring the existence of some uncontrollable factors. Langer [1975] studied the betting events where people tend to choose their own numbers rather than machine numbers in order to achieve the psychological satisfaction of improving the “odds” of winning. Based on this conclusion, he had a more in-depth analysis of the executive team and found that the same mentality is true for senior executives too. Executives often feel that the development of enterprises and investment decisions are under their own control, ignoring other uncertainties, overestimating the profit, and underestimating the risks. Such overconfidence often results in drastic decision failure.

Excessive optimism refers to the tendency to think of future events as being in the right decision. Cooper et al. [1988], an American entrepreneur, found that the percentage of entrepreneurs thinking their company is successful is almost 80%, while the percentage of others thinking they can succeed is as low as 60%. The real findings are surprisingly close to the companies involved in the survey was later ended is dismal and the percentage was 60%. Researchers such as Heaton [2002] confirmed this phenomenon.

Based on the previous articles on elaborate pay gap incentive effect, as well as domestic and foreign literature, it is evident that most of the current scholars confirmed that there is a real correlation between employee pay gap and organizational performance. However, regarding the direction of influence, debates still exist. In recent years, it has been announced that China’s economy will further be pushed forward with supply side and financial reform will be the main focus of deepening reform. The economic state of affairs will be more complex, and technology updates will be more rapid. The result will definitely affect the listing of company executives than the ordinary business executives who need to process more information, resulting in more working stress and energy investment. Therefore, it would be justifiable to give higher remuneration to them. In addition, it is well known that “higher power distance” has a long history in the Chinese society and there are obvious differences in social status and income of enterprises. Therefore, to the executives, the income reward not only indicates its compensation for the contribution of enterprise value but also shows its social status and the advantage of power in the organizations. Numerous scholars such as Wanli and Shaoxiang [2006], Chun et al. [2003], Shin [2008], and Banker et al. [2016] have concluded that the pay gap between executives and employees can indeed motivate managers to improve performance and to work harder improving organizational performance.

However, it is important to pay special attention to the long process in which the pay gap plays a significant role. Management is mainly composed of decision making, planning, organizing, etc. Comparing to other ordinary and technical functions, its timeliness will be longer where the beginning of the implementation to the effect will have a certain time lag. On the other hand, according to the operating conditions, most of the listed firms have developed a salary assignment for the (t+1) year at the end of t (or even earlier). It covers basic salary, performance pay, and bonus income. This program started in the first t+1 year. At the end of the year, according to the actual performance, salary compensation for the executives as a means to define the period of business year’s end income remuneration, leading to the first t+1 year pay gap. This pay gap will also affect the management’s pay satisfaction and the next year’s t+2 year performance. This shows that from the view of time continuity, the T at the end of the year worked out the first t+1 revenue distribution system, the t+1 year generates the economic consequences and pay gap for the remuneration received, and the t+2 year performance of the year has an impact. Therefore, from the perspective of the lag of salary incentives, the relationship between executive pay gap and future performance can be derived through the following hypothesis:

H₁: Executive–employee pay gap is positively correlated with the company’s future performance, i.e., the greater the pay gap in T year, the higher the first t+1 enterprise performance level in that year.

Based on management power theory, as managerial power increases, it has the strength and motivation to gain more self-interest through other channels. At this time period, it does not make due contribution to the enterprise value and in more mainstream performance assessment, income compensation to achieve growth is highly unlikely. The income compensation of the ordinary workers has also been misplaced, unreasonably widening the pay gap between the executives and employees. However, this gap cannot only encourage the executives to improve performance but will make ordinary workers feel that their normal income is violated. They have inequitable feelings and dissatisfaction resulting in work slack, idleness, and other negative performance indicators having a bad impact on the organization. In combination with previous hypotheses, the authors think that the incentive lag does still exist when managerial power increases, which led to the following hypothesis:

H₂: The greater the managerial power, the weaker the positive relationship between pay gap and future performance of the enterprise.

This paper uses the executive shareholding ratio and the two-level concurrent indicators to measure management authority features to analyze the moderating effects of variables in the lag of compensation incentive. Higher executive ownership indicates that management is further elevated in the corporate sector and has more clout in voting and designing payroll system. When executives combine dual roles of managers and shareholders, they exacerbate information asymmetry with their clients and increase the likelihood to manipulate their surplus to achieve personal gain. At this point, even if the board managers ensure higher pay gap to stimulate management to work hard, they will not be able to achieve the desired incentive as the equity dividend has already been partially replaced by the original incentive effect of monetary reward along with higher executive shareholding. Up to this point, the executive layer has reached a higher position in addition to getting more paid income. However, if the ordinary workers are not provided with reasonable compensation, the incentive effectiveness will be weakened and the income satisfaction will be declined, creating some negative emotional performance and hindering company’s development. In combination with hypothesis 1, it has been assumed that the lag incentive of pay gap still exists under the situation of higher executive shareholding, which leads to the following assumption:

H_2A: The higher the executive ownership, the weaker the positive relationship between pay gap and future performance of the enterprise.

If two positions concurrently such as the Chairman and CEO are held by the same person, in which case his/her managerial authority increases but the board power is reduced, the management-friendly income distribution scheme is easier to pass at board resolutions. Conversely, if the two jobs can be separated where a form of mutual supervision and gaming balance can be enabled, it would save some supervision costs to some extent. It would also help the CEO to reduce some rent-seeking risks where management can effectively restrain its ability to gain wealth through its own power advantage, design a more reasonable as well as scientific salary distribution scheme, improve the salary satisfaction level of the ordinary employees and thus stimulate all the staffs to work hard to create more enterprise value [Wang et al., 2013]. In combination with hypothesis 1, it has been assumed that the lag incentive of pay gap still does exist under the circumstance of two positions, which leads to the following hypothesis:

H_2B: Both the Chairman and CEO will weaken the positive relationship between the pay gap and future performance of the enterprise.

The management overconfidence theory points out that executives, as in the top of the corporate decision-making sequence, are more likely to generate overconfidence by virtue of specificity of their positions and advantages of power. In fact, when executives appear to be overconfident, they produce a better than average mentality and tend to control illusion. However, at the same time, management uses their own power to seek greater private interests, manipulate the corporate surplus or custom pay, and run the risk of rent-seeking. However, when the overconfidence of senior management of their own income growth increases, it does not make a contribution to the firm up to same extent. Heaton [2002] and Goel and Thakor [2008] found that overconfident executives tend to be optimistic about the corrections of information they own for expected return, ignoring possible risks. Gervais et al. [2009] argued that overly assertive executives are more likely to attribute higher performance of an organization to their superior talent and decision-making power, creating a negative relationship between business performance and managerial overconfidence. In other words, the higher the managerial overconfidence, the higher the pay gap between executives and ordinary employees but the lower the corporate performance. In combination of hypothesis 1, it has been assumed that the lag incentive of pay gap exists under managerial overconfidence, thus making the third assumption:

H₃: The higher the managerial overconfidence level, the weaker the relationship between executive pay gap and the future performance of the organization.

The explanatory variables involved in this study are first T year (i.e., 2016 executive–employee pay gap) and t+1 year (enterprise performance in 2017). The other variables used are ratio of executives’ stock holding and two posts to measure the characteristics of management power. In addition, the characteristics of management overconfidence are measured by the change in management shareholding and the adjustment effects between the two factors on the pay gap and future performance of the enterprises studied. The control variables are the growth of enterprise, technical complexity, capital structure, firm size, and firm and industry nature.

Future enterprise performance has been assumed to be indicated by EPS, which is the result of the efforts of all employees and can be measured by accounting and market index. The former is based on the accounting index of the company in a certain period of time. It is the reflection of the performance of organization such as return on net assets and total asset yield. The latter one is an estimate of the expected performance of business and an assessment of the future value of the enterprise such as Tobin’s Q value. The previous scholars’ metrics to value the future performance of Chinese domestic firms have been depicted in Table 1.

This paper draws on Hou et al. [2016], using t+1 year [2017] EPS, to measure the companies’ future business performance. EPS is the core index to measure the value of stock investment reflecting the level of the profit. Therefore, it is more reasonable to use it as a measurement level of enterprise performance. EPS is calculated as follows: EPS=Final net profitTotal stock number{\rm{EPS}} = {{{\rm{Final}}\,{\rm{net}}\,{\rm{profit}}} \over {{\rm{Total}}\,{\rm{stock}}\,{\rm{number}}}}

Pay gap between executives and ordinary employees has been denoted as Megap. This paper adopts the practice drawn by Lu and Gao [2013] who define the executive–employee pay gap as follows: Pay gap between executive staff=average executive pay−average employee pay{\rm{Pay}}\,{\rm{gap}}\,{\rm{between}}\,{\rm{executive}}\,{\rm{staff}} = {\rm{average}}\,{\rm{executive}}\,{\rm{pay}} - {\rm{average}}\,{\rm{employee}}\,{\rm{pay}}

As required by the formula, we need to define executive compensation and employee compensation separately.

Scholars have discussed the features on management authorities that have arisen in recent years. Among them, Finkelstein [1992] first established a model arguing that management power can be divided into the organizational structure of power, owner power, expert power, and reputation power. After that, based on this model, researchers began to carry out further investigations. Some adopted multiple metrics, while some others were dependent on a single metric such as large shareholdings [Core et al., 1999] and two concurrent jobs [Cohen and Lauterbach, 2008]. In addition, some scholars took comprehensive indicators to measure management power. Table 4 systematically combines the indicators of management power used by the researchers.

In this paper, based on previous research, the authors choose the executive shareholding ratio (Share) and two posts (Duality) to measure management power: (1)

Executive ownership ratio (Share): The ratio of top managers to total shares. The higher the value, the greater the power.

Exploring the degree of overconfidence of managers is the key and most difficult part of this study. As overconfidence is primarily a state of psychology, there is hardly any way to link it directly to financial indicators and macro metrics. Nevertheless, scholars are still trying and proposing some substitute variables as summarized in Table 5.

From the point of view of data availability and accuracy, this paper chooses the management shareholding change to measure overconfidence in management. Zhang [2008], Zhu and Tang [2010], Sun and Zhao [2014], Liang et al. [2015], and other Chinese scholars have adopted the management stock change as the indicator of representing the management overconfidence characteristics as desirable.

Management shareholding movements (overconfidence) in a 2-year study period (2015–2016) increase the level of overconfidence in management, at which point the variable takes a value of 1 or 0.

Enterprise growth indicates the ability to develop continuously during the future business period. The more mature the firm, the more scientific the design of its pay structure [Brockman et al., 2010; Eisdorfer et al., 2013; Hosain, 2014]. When the goals of the firm and the employees match, it can not only make the employees get the expected income remuneration but also let the enterprise toward the better direction of development. This shows that the firm growth changes due to the change in salary structure. The paper takes the total asset growth rate with the following formula: Firm growth=total assets at the end of the term−opening total assets)/total assets at the beginning ofthe period\matrix{ {{\rm{Firm}}\,{\rm{growth}}} \hfill & { = } \hfill & {{\rm{total}}\,{\rm{assets}}\,{\rm{at}}\,{\rm{the}}\,{\rm{end}}\,{\rm{of}}\,{\rm{the}}\,{\rm{term}} - {\rm{opening}}\,{\rm{total}}\,{\rm{assets}})/{\rm{total}}\,{\rm{assets}}\,{\rm{at}}\,{\rm{the}}\,{\rm{beginning}}\,{\rm{of}}} \hfill \cr {} \hfill & {} \hfill & {{\rm{the}}\,{\rm{period}}} \hfill \cr}

Zhang [2008] found that the increase in technical complexity of the enterprise increases the information processing activities of executive team members, affecting the cooperation demand among them. The cooperation demand can adjust the relationship between the pay gap and enterprise performance. The results found by Li et al. [2008] also point out that when the industry is in a high degree of technical intensity, the vertical pay gap of the executive team will be offset against the performance of the championship. When the technical complexity of the enterprise is higher, the interdependence among the workers will increase, and at this point, the widening pay gap will destroy the cooperative behavior among the workers, thus reducing the cohesion in the teamwork. This negative impact may exceed the expectations of the tournament incentive, thus adversely affecting the performance of the enterprise. Therefore, it is necessary to control the technical complexity. This paper uses the number of research and development personnel accounted for. The calculation formula is as follows: Technical complexity=number of development/total number of employees{\rm{Technical\ complexity}} = {\rm{number\ of\ development}}/{\rm{total\ number\ of\ employees}}

Capital structure is an indicator of financing theory based on different financial options such as internal financing, debt financing, and equity financing. When the firm’s internal capital is adequate, it is more inclined to use own capital to complement the operational needs. In this case, the ratio of assets and liabilities are kept at a lower level. If the external debt is higher, its day-to-day operations tend to be more cautious, abandon high-risk projects, and depress the wages of employees as far as possible to maintain the stability of the performance or the trend of decline. Based on this, it can be said that the asset–liability ratio does have a certain impact on enterprise performance. Therefore, it is necessary to control the ratio. This paper takes the capital structure (Lever) to represent the asset–liability ratio, which is calculated as follows: Lever=total liabilitytotal assets{\rm{Lever}} = {{{\rm{total}}\,{\rm{liability}}} \over {{\rm{total}}\,{\rm{assets}}}}

The theory of economies of scale holds that when the factors such as the land area, production level, and human capital of the firm expand, its day-to-day operation and market transaction cost reduce due to the formation of scale effect. However, the size of expansion also increases difficulty for management. The organization then needs more competent managers to conduct internal control, requiring paying more attractive pay to the executives. At the same time, if the increase in the size of general staff is not really big, it indirectly pulls up the pay gap. Therefore, the size of the firm needs to be controlled. This paper uses the measurement of logarithm of total assets. Total assets=total fixed assets+total current assets{\rm{Total}}\,{\rm{assets}} = {\rm{total}}\,{\rm{fixed}}\,{\rm{assets}} + {\rm{total}}\,{\rm{current}}\,{\rm{assets}}

Rosen [1986] believes that in the tournament incentive process, if the participants differ in their own nature, the promotion of the incentive will be different and will interfere with the original allocation of resource efficiency. This phenomenon is particularly evident in SOEs. Owing to the existence of political interference, the promotion opportunity of the internal competition of SOEs does not necessarily depend on the ability to work and performance; rather, it can be obtained through political contract or catering to the preference of superior managers. On the other hand, comparatively speaking, the administrative appointment of the private enterprises is produced from inside, valuing the ability and performance of the employees. On the basis of whether a listed company is a state-owned or a private holding, regardless of its corporate culture, organizational structure or business strategy will have a large difference. Based on this, the nature of the firm will have different effects on the incentive of compensation. Therefore, it is necessary to know the nature of the firm. If it is a fully state-owned firm, the variable takes the value as 1, otherwise it is 0.

The same industry, which is affected by risk, profit patterns, competitive strength, and corporate performance, will provide different results. Based on this, this paper, in the discussion of enterprise performance, needs to fully consider the industry difference. Therefore, industry factors need to be controlled. This article adopts the industry classification standard with the value of manufacturing firms as 1; if otherwise, the value is 0.

To sum up, all the variables selected are shown in Table 6.

The study makes a statistical analysis of industry distribution of sample firms as shown in Table 7.

In valid 1,189 sample data, the number of manufacturing companies is 933 (78.5%), followed by information transmission, software, and information technology services 80 (6.7%) and the wholesale and retail industry 34 (2.9%). The minimum sample for accommodation and catering and education is 1 each with a ratio of 0.1%. This reflects in Shanghai and Shenzhen A shares of listed firms; the manufacturing firms accounted for the bigger portion, while information transmission, software, and information technology services industry is also raising inline currently to pursue the economic status quo.

All the model variables involved with this descriptive statistics have been highlighted in Table 8.

In Table 8, the average EPS of listed firms is 0.32, a bit above the median value (0.21), indicating that most firms have higher after tax profits per share and better profitability ratio. However, the maximum value is 14.27, while the minimum value is −3.12, showing a substantial gap between the firms’ profit level.

Executive pay gap between employees (Megap) has a range of 10.75 and 16.09. Although it is the result of the pay gap after the logarithm, it is still able to a certain extent to show current China’s listed enterprises where the pay gap is relatively large, reflecting the practical significance of research regarding the salary gap.

Executive ownership ration (Share) is 11%, which is much higher than the median value (1%), showing that most of the listed companies have higher executive shareholdings. However, the range is 0.00% to 70.00%, indicating a large disparity in the proportion of executives held by different companies.

Holding two positions concurrently (Duality) and management shareholding movements (Overcon) are virtual variables with the maximum and minimum values of 1 and 0.

Enterprise growth (Growth) is 0.22, which is significantly higher than the median value (0.12), showing that most of the listed firms in China have strong development power. However, the range is −0.38 to 8.55, indicating that there is a big gap in the sustainable development potential of various firms.

Technological complexity (Tech) has the average value of 14.23, which is well above the median value of 11.29, indicating that the research and development personnel of the listed firms are higher in number than the whole samples. The range is 0.00 to 85.53, showing that there is a significant gap between the research and development technicians in different enterprises, which may be related to the industry in which they belong. In general, the ratio of research and development personnel in the information transmission, software, and information technology services industry is much higher than that in other industries.

Capital structure (Lever) is 43%, describing that the ratio of current assets and liabilities of “A” listed firms is reasonable. The minimum value is only 4%, but the maximum value is 104%, indicating the debt ratios in different enterprises.

Enterprise size (Size) is 22.39, and the median value is 22.24, indicating that the asset scale distribution of the firms listed in Shanghai and Shenzhen stock exchanges is more balanced.

For a clearer understanding of the relationship between executive–employee pay gap and future performance of the firms, the EPS and Megap have been divided into descriptive statistics for the industry as detailed in Table 9.

From the point of future performance indicator, EPS of P (education) has the largest value, i.e., 0.70, followed by K (real estate), which is 0.63. The smallest value is of the mining industry (B), which is 0.06. From the point of mean value of pay gap (Megap), the real estate (K) has the biggest value of 14.33, followed by culture, sports, and entertainment (R) having the value of 13.59; the mining industry (B) has the smallest value, which is 13.12. It can be observed that regarding pay gap and future performance, there is a certain correlation between high profit level and pay gap. In case of lower profitability industry like mining, the gap is correspondingly smaller. In fact, it reflects that the future performance of the enterprise and the executive pay gap are linked. However, to answer the questions such as how do they affect each other, how do they affect the direction, or are there any factors affecting the relationship, further exploration is needed.

Executive pay gap between employees (Megap) is an explanatory variable and future performance (EPS) is the dependent variable that has added interactivity to the model. To explore the management power characteristics of the executive stock ratio to pay gap incentive adjustment effect (Megap*Share), the following regression analysis has been conducted (Table 11).

Table 11 shows that change in R² values are 0.104, 0.022, and 0.004, respectively, indicating the fitting of the model is acceptable. Additionally, the significance of F has changed to 0.021, which is less than 0.05, indicating that the model has passed the F-test and is statically significant. In this study, the VIF value is used to analyze the collinearity problem among the variables. As it can be seen from Table 11, the VIF values are far below 5, indicating that no multiple collinearity among the variables were involved.

Megap’s beta value is significantly positive, and the coefficients are 0.158 and 0.149, indicating that its pair EPS represents a significant positive impact on future performance, matching the tournament theory. Therefore, H₁ (the higher the salary gap, the higher the level of future performance of the firm) is supported. In addition, Megap*Share has a significant negative moderating effect on the future performance of the enterprise, indicating that when the proportion of senior executives in a listed company rises, it weakens the positive relationship between the salary gap and corporate future performance, supporting H_2A.

The results show that, as a measure of managerial power characteristics, the ratio of executive stock ownership can really play a role in the relationship between pay gap and future performance, and this is a weakening effect. As the company’s senior executives, their professional competence and internal information superiority are the cornerstones of leading the development of enterprises; as shareholders, they can express their opinions and exercise their power in the general meeting of shareholders. Comparing to the simple salary incentive, the advantage (for the executives only) of the equity dividend is that the senior executives can use their own identity advantages to decide the company’s decision or even to set the salary, which will lead to the reduction of the incentive effect of monetary reward, thus making the organization’s performance target difficult to achieve. In addition, when the ratio of executive stock is higher, the pay gap between ordinary employees and senior executives is actually widening. If the company does not “share” a certain stake to the employees, then it will inevitably breed dissatisfaction; when this is not satisfied with the unfair feelings of money to bring the incentive effect, workers will appear slack, “idle”, and so on; even if executives work hard, they still have a negative impact on business performance.

Since the value of the two posts (duality) is 1 and 0, it is not possible to add interaction items directly to the regression model when studying the moderating effect of the power characteristics of the management layer. According to the statistical principle, using the method of Liu and Sun [2010], the samples are divided into two groups: “two-post-concurrent group” and “non-two-post-concurrent group”. After putting the two sets of data into the model, the following results have been discovered.

From the regression results of Table 12, it can be seen that the change in R² values are 0.188 and 0.130, respectively, which indicates that the fitting degree of the model is acceptable. In addition, the significant F change is 0.000, which is below 0.05, indicating that the model passed the F-test and is statistically significant. In this study, the VIF value is adopted to analyze the collinearity problem among variables, and it can be seen from Table 12 that the VIF value of each variable is far below 5, which indicates that there is no multiple collinearity among the variables involved.

In the regression model of the two-post group, Megap’s beta is positive, with a coefficient of 0.088, indicating a positive correlation between the executive–employee pay gap and future performance as the chairman and CEO. After controlling other variables, Megap can increase EPS by 0.088 per 1%. In the regression model of the two-post group, Megap’s beta is also positive, with a coefficient of 0.181, indicating a positive correlation between the executive-employee pay gap and future performance in the separation of the chairman and CEO posts. In this case, after controlling other variables, for every 1% Megap, the EPS can be increased by 0.181%. The regression results of both sets of data support the tournament theory, supporting H₁ again.

By comparing the b value of the Megap of two sets of data, we can find that the beta value (0.181) in the regression model of the second-grade group is much higher than the beta value (0.088) in the regression model of the two-post group. Such results indicate that whether or not two roles exist in the incentive to pay gap, there is a certain difference. When the chairman and CEO is the same person, it will weaken the pay gap to the future performance incentive. Therefore, H_2B is supported.

The results show that the two posts, also as another measure of managerial power, can indeed regulate the relationship between the pay gap and the future performance of the firm, and this is a weakening effect. When the chairman and CEO is the same person, management power increases and board independence is lowered, meaning that the management-friendly income distribution scheme makes it easier to pass the board’s resolution, indicating that executives can get higher monetary rewards. In addition, management has the strength and motivation to obtain more wealth through other channels, such as manipulating salaries and rent-seeking. However, if the management does not offer some compensation to the ordinary workers, the positive pay incentive attitude will be greatly reduced, employee satisfaction to pay will be lowered, and even some emotional negative behavior might arise, thus affecting the company’s development.

Since the value of management shareholding movements (Overcon) is also between 1 and 0, it is not possible to add interaction items directly to the regression model when studying the regulatory role of overconfidence represented by the management. Consistent with the test of H_2B, the data are divided into two groups: the management overconfidence group and the non-management overconfidence group. Then, the two sets of data are put into the model for analysis. The regression results are shown in Table 13.

Megap, pay gap between executives and ordinary employees; SOE, state-owned enterprise. From the regression results of Table 13, it can be seen that the change in R² values are 0.098 and 0.132, respectively, which indicates that the fitting degree of the model is acceptable. In addition, the value of significant F is changed to 0.001 and 0.000, having the value less than 0.05, indicating that the model passed the F-test and is statistically significant. In this study, the VIF value is used to analyze the collinearity problem among variables, and it can be seen from Table 13 that the VIF values of each variable are far below 5, which indicates that there is no multiple collinearity among the variables involved.

In the regression model of the management overconfidence group, the b value of Megap was positive and the coefficient was 0.125, which meant that there was a positive correlation between the executive– employee pay gap and the future performance of the enterprise with overconfidence in management. After controlling other variables, 1% increase in the Megap value can increase the EPS by 0.125%. In the regression model of the non-management overconfidence group, Megap’s beta value is also significantly positive, with a coefficient of 0.164, indicating that there is no overconfidence within the management and there is still a positive correlation between the executive–employee pay gap and future performance. In this regard, after controlling the other variables, 1% increase in the Megap value can increase the EPS by 0.164%. The regression results of both sets of data support the tournament theory, validating H₁ again.

By comparing the Megap beta values of the two sets of data, we can find that the beta value (0.164) in the regression model of the overconfidence group is much higher than the beta value (0.125) in the regression model of the management overconfidence group. This shows that the management of excessive self-confidence on the incentive to pay gap has a certain difference in the impact. When the internal management shows overconfidence, it will weaken the pay gap in the future performance of the positive effect. Therefore, H₃ is supported.

The result shows that the change in management shareholding is a measure of overconfidence of management, which can influence the relationship between pay gap and future performance and is a kind of weakening effect. When management overconfidence increases, it will produce a “better than the average” mentality and will tend to “control illusion”. As a result, management will use their identity advantage to gain more personal benefits. However, at this time, managers do not create more value for the company. If the ordinary employees will not be paid sufficient compensation, the executive–employee pay gap will be indirectly widened and pay to the staff incentive will be weakened, resulting in negative behavior of employees, which will finally damage the corporate performance.

Based on the shareholding ratios held by the executives, the following diagram (Figure 2; also see Table 14) has been developed. However, it should be noted that such corresponding diagram can be made only for the first adjustment.

Figure 2

By collating and analyzing the collected data, the hypothesis is tested by multivariate linear regression method. The test results of the five research hypotheses are shown in Figure 3 and Table 15.

Figure 3

Considering the above literature works and hypotheses, the following theoretical framework has been developed for this study:

At present, the internal executive–employee pay gap in Chinese listed enterprises has a significant positive impact on the future performance of the enterprise, which shows that the tournament theory is more suitable to explain the salary incentive among senior executives–employees in Chinese perspective. The authors believe that there are two reasons leading to this positive relationship. First, this may be related to China’s current economic environment. In recent years, the speed of China’s labor market development and the competition between workers has gradually become normal inside the company. Whether it is a senior manager or the general staff, a slight lag in performance may be eliminated. To make someone irreplaceable, he/she needs to have strong performance and cutting-edge innovative thinking. Second, the difference in salary compensation can satisfy the manager’s “vanity” psychology and stimulate the staff’s achievement desire. On one hand, the high income and high positions that managers can provide them with enough superior psychology allows management to take the initiative, maintaining a state of passion in front of ordinary workers. On the other hand, when workers realize that the pay gap between themselves and management has not reached the “unattainable” level, their desire for success will grow with full passion and outstanding performance. This shows that within the listed companies, the tournament theory can better explain the incentive effect between the executives and the staff, while the compensation scheme makers can use this feature to design the reasonable pay gap.

Under the influence of different management power characteristics, the pay gap has a weakening effect on the future performance of the enterprise. In particular, the increase in the ratio of executive shareholding and the incentive effect of the two positions will reduce the salary gap. This shows that the level of internal management power of the enterprise does have a role in the future performance of the enterprise. When the management power expands, executives have the motivation and ability to obtain more wealth through other channels, such as manipulation of pay and rent-seeking. However, if the company does not give ordinary workers certain compensation, the salary incentives for workers will be greatly reduced; the employee’s income satisfaction will decrease and can even show some of negative emotional behavior. At this time even if the senior executives work hard, they will have a negative impact on the organization’s operating performance due to lack of commitment and teamwork from the ordinary employees.

As a measure of the overconfidence of management, the change in management stock ownership can actually adjust the relationship between the pay gap and the future performance of the enterprise, which actually is a weakening effect. When management is overconfident, it produces a “better than average’ mentality and tends to “control illusion”. In this case, management will use their power to grab more wealth. However, when overconfident executives grow their own wealth, they do not contribute to the improvement of corporate value. At this time, if the ordinary workers are not given a certain amount of additional compensation, the salary gap between the executives and the staff will be indirectly expanded. This will weaken the incentive motivation, leading to negative work performance of ordinary workers, which is not conducive to enterprise development.