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

Ping Liu; Md Sajjad Hosain; Liyan Li

Open Access

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

Ping Liu

Md Sajjad Hosain

and

Liyan Li

| Dec 31, 2019

International Journal of Management and Economics

Volume 55 (2019): Issue 4 (December 2019)

About this article

Cite

Published Online: Dec 31, 2019

Page range: 287 - 318

Received: Feb 18, 2019

Accepted: Dec 20, 2019

DOI: https://doi.org/10.2478/ijme-2019-0025

Keywords
China, pay gap, performance, firm, managerial power, managerial overconfidence

© 2019 Ping Liu et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Adjustment effect diagram to depict the executive shareholding ratio.

Depiction of validation of hypotheses through theoretical framework.

Executives holding two posts, pay gap, and future performance of the enterprise

Variables	Two posts concurrently			Non two posts concurrently

	Coefficient	Significance	VIF	Coefficient	Significance	VIF
Constant	−3.326^***	0.000		−5.393^***	0.000
Megap	0.088^*	0.037	1.366	0.181^***	0.000	1.200
Growth	0.173^**	0.002	1.161	0.065	0.152	1.045
Tech	−0.001	0.679	1.279	−0.002	0.354	1.151
Lever	−0.425^**	0.007	1.531	−0.937^***	0.000	1.520
Size	0.123^***	0.000	2.055	0.161^***	0.000	1.784
SOE	−0.026	0.703	1.249	0.110^*	0.017	1.162
Ind	−0.136^*	0.038	1.197	0.082	0.129	1.105
R²		0.188			0.130
F		9.236^***			19.088^***
Change in R²		0.188^***			0.130^***

Common metrics used for management authority

Author(s)	Management power metrics
Bebchuk et al. [2002]	CEO term and number of years of service, board independence, whether the CEO serves as chairman, whether the CEO retires within 2 years, and whether the CEOs are the major shareholders or not
Cheng et al. [2008]	Whether the CEO is the founder, chairman, and sole internal director with a large representation of the right or not
Coombs [2007]	Term of office, shareholding ratio, and two posts concurrently
Lurui [2007]	Second grade, share diversification, and senior executive tenure
Yan et al. [2015], Graham et al. [2017], Grinstein and Hribar [2003], Shin [2008] and Dai [2014]	Years of service as CEO, double duty, equity concentration, and whether the CEO is the founder or not
Schwab and Thomas [2006]	CEO’s preference of rights to bargain for
Justin et al. [2016]	Degree of decentralization and concurrent and independent directors ratio
Chen and Li [2008] and Shaojian De and Zhang [2014]	Integration of two posts, internal director ratio, board size, and shareholding ratio of the first major shareholders
Yu [2015]	Unification of two posts, diversification of shareholding, and proportion of management
Becht et al. [2003]	The proportion of control rights, the degree of separation of two rights, and the unification of two posts
Graham et al. [2017]	Unification of two posts, diversification of shareholding, size of board directors, and proportion of independent directors
Long and He [2018]	The number of board, executive title, senior management qualifications, senior management executive ownership, senior management tenure, and stock rights dispersed

Pearson’s correlation factor among the relationship between the variables

Variables	EPS	Megap	Share	Duality	Overcon	Growth	Tech	Lever	Size	SOE	Ind
EPS	1
Megap	0.248^**	1
Share	−0.026	−0.064^*	1
Duality	0.000	0.001	0.258^**	1
Overcon	0.020	0.035	0.203^**	0.060^*	1
Growth	0.090^**	0.073^*	0.175^**	0.079^**	0.156^**	1
Tech	−0.014	0.057^*	0.232^**	0.092^**	0.106^**	0.156^**	1
Lever	−0.084^**	0.026	−0.304^**	−0.113^**	−0.092^**	−0.042	−0.246^**	1
Size	0.208^**	0.347^**	−0.263^**	−0.141^**	−0.003	0.044	−0.229^**	0.540^**	1
SOE	0.043	−0.037	−0.512^**	−0.284^**	−0.204^**	−0.186^**	−0.178^**	0.311^**	0.290^**	1
Ind	−0.027	−0.123^**	0.024	0.024	−0.066^*	−0.027	−0.150^**	−0.147^**	−0.232^**	−0.071^*	1

Adjustment effect for the executive shareholding ratio

Constant	X coefficient	M coefficient	X*M	M value	X value	Low executive shareholding ratio	Low executive share-holding Ratio
−2.726	0.149	−0.035	−0.441	−0.164	10.750	−0.34208	−1.90642
				0.16378	16.09	0.839274	−1.49645

Variable tools

Variable type			Variable code	Measurement formula
Explained variables	Future performance of the firm		EPS	Final net profit/total number of closing units
Interpreting variables	Pay gap between employees and executives		Megap	LN (average remuneration for directors, supervisors, and top three employees-average pay for general employees)
Adjusting variables	Management power characteristics	Executive shareholding ratios	Share	Total executive stock holdings/total number of shares
	Management power characteristics	Two posts concurrently	Duality	If the chairman and general managers concurrently hold two posts, the value is 1; otherwise, it is 0
	Management power features	Management holdings	Overcon	If the management holdings increased during the 2-year research period, the value will be 1; otherwise, it is 0
	Management overconfidence features	Changes	Overcon
Control variables	Growth of enterprise		Growth	(Final total assets-opening total assets)/opening total assets
	Technical complexity		Tech	Total number of developments/total employees
	Capital structure		Lever	Total liabilities/total assets
	Enterprise scale		Size	LN (year-end total assets)
	Company nature		SOE	The value of state-owned firm is 1; otherwise it is 0
	Industry		Ind	The value of manufacturing industry is 1; otherwise, it is 0

Common metrics used for managerial overconfidence

Substitution variables	Measurement method	Principle
Management relative compensation	Top three executive compensation/all executive compensation	The higher the management’s relative pay, the stronger its ability to control the firm with confidence [Hayward and Hambrick, 1997; Liu et al., 2010; Kang, 2016]
The historical performance of the enterprise	High performance in company’s annual reports	Managers tend to attribute high historical performance to their outstanding talent and decision-making power [Bettman and Weitz, 1983; Hayward and Hambrick, 1997]
Mainstream media evaluation	The vocabulary used to collect reports, as shown in self-confidence, optimism and so on with overconfidence, appears robust and reliable	The more number of words describing optimism, the more overconfident they are [Hayward and Hambrick, 1997]
Deviation of enterprise profit forecast	Compare the forecast profit of the enterprise with actual one	The more assertive an executive, the easier it is to estimate its profitability optimistically [Lin et al., 2005; Xia et al., 2014]
Management stock change	Management to increase shareholding	If management is optimistic about the future development of enterprises, it increases their holdings [Carpenter, 1998; Claessens et al., 2002; Malmendier and Tate, 2008]
How often the management implements mergers and acquisitions	Number of merger acquisition decisions made by executives over a period of time	The more assertive executives are inclined to overestimate mergers and acquisitions, the more they are engaged frequently with mergers and acquisitions [Doukas and Petmezas, 2007]
Industry sentiment index	Index interval is 0–1, if >100 is considered as overconfident	The larger the index, the more overconfident the executives are [Zou et al., 2006; Baker and Jeffrey, 2007]
Consumer confidence index	Consumers’ estimation of current market situation and subjective perception of consumption psychology	The larger the product value, the more overconfidence the executives represent [Oliver, 2005]

Executive ownership ratio, pay gap, and future performance of the enterprise

Predictor variables	EPS

	Model 1	Model 2	Model 3	Variance Inflation Factor
Step 1: Control variables
Growth	0.097^*	0.094^*	0.096^*	1.074
Tech	0.000	−0.001	−0.001	1.192
Lever	−0.922^***	−0.821^***	−0.802^***	1.571
Size	0.197^***	0.151^***	0.148^***	1.853
SOE	0.055	0.078	0.079	1.476
Ind	0.026	0.033	0.032	1.114
Step 2: Interpreting variables
Megap		0.158^***	0.149^***	1.252
Share		0.003	−0.035	1.478
Step 3: Adjusting variable
Megap^*Share			−0.441^*	1.058
Step 4: Predictor variables
R²	0.104	0.125	0.129	Durbin-Watson1.410
F	22.788^***	21.159^***	19.470^***
Change in R²	0.104^***	0.022^***	0.004^*

Common metrics for executive pay

Author(s)	Compensation indicator metrics
Xin and Lin [2006] and Fang [2009]	Logarithm of the average remuneration of the top three directors
Lurui [2007], Zhou et al. [2013], and Wang [2015]	Logarithm of the average remuneration of the top three highest paid executives
Tong and Lu [2005] and Lu and Zhao [2008]	Ratio of total annual salary of directors, supervisors, and senior executives to the total number of salaried executives
Zhang [2008] and Chen and Xu [2001]	Total annual salary of directors, supervisors, and senior executives
Haung and Yao [2013]	The ratio of directors, supervisors, and executives’ salaries to the total number of executives
Lu [2014]	Ratio of total annual salary of directors, supervisors, and senior executives to the total number of executives
Kato and Long [2006]	Logarithm of the average remuneration of the top three directors, supervisors, and senior executives

Common metrics for employee compensation

Author(s)	Compensation indicator metrics
Philip and Paul [2008]	Cash paid to employees-total management salary/cash received from sales of goods or service
Shen et al. [2013]	Cash paid to employees/average number of employees per year
Fang [2009] and Lu [2014]	(Cash paid to workers+employee compensation at the end of the quarter)-(employee compensation at the beginning of the quarter-executive annual pay)/(total employees-executive number)
Chen and Li [2011]	(Cash paid to employees and supervisors-the total annual remuneration of supervisors)/(total number of employees-total number of executives)

Common measures for future performance of domestic (Chinese) firms

Author(s)	Performance metrics
Zhang [2008] and Cao et al. [2016]	t+1 total asset yield for the year
Hou et al. [2016]	t+1 EPS for the year
Chen [2004]	t+1 total asset return and net assets utilization for the year
Lin [2015]	Company future performance (first year, second year, and third years’ average performance)
Chen et al. [2005]	The total asset yield of the company in the second year and the average total asset yield for the following 3 years

Descriptive statistics of dependent (EPS) and independent variables (Megap)

Industry	EPS			Megap

	Average	Minimum value	Maximum value	Average	Minimum value	Maximum value
B	0.06	−2.17	0.74	13.12	11.99	14.23
C	0.31	−3.12	14.27	13.22	11.12	16.09
D	0.41	0.02	0.95	13.14	12.45	13.94
E	0.39	0.05	1.37	13.33	10.75	14.42
F	0.40	−0.32	3.16	13.59	12.45	14.84
G	0.36	0.19	0.82	13.24	12.52	14.43
H	0.49	0.49	0.49	13.43	13.43	13.43
I	0.35	−0.48	2.25	13.46	12.25	15.09
K	0.63	0.19	1.44	14.33	13.34	15.57
L	0.41	0.04	1.63	13.38	12.60	14.47
M	0.20	−0.51	0.72	13.45	12.56	14.58
N	0.44	0.12	1.27	13.03	12.54	13.43
P	0.70	0.70	0.70	13.25	13.25	13.25
Q	0.36	0.16	0.56	13.24	13.19	13.28
R	0.51	0.05	1.06	13.59	12.78	15.17

Validation of hypotheses

Hypotheses	Content	Verified or not
H₁	Executive–employee pay gap is positively correlated (0.248) with the firm’s future performance, i.e., the greater pay gap in t the year (the first t-1), the higher the performance level in that year.	Verified
H₂	The greater the management power, the weaker (−0.441) the positive relationship between employee pay gap and future performance	Verified
H_2A	The higher the percentage of executive ownership, the weaker (−0.035) the positive relationship between pay gap and firm future performance	Verified
H_2B	Chairman and general manager holding two posts concurrently weaken (−0.164) the positive relationship between pay gap and firm future performance	Verified
H₃	The higher the level of management overconfidence, the weaker (−3.425) the positive relationship between pay gap and firm future performance	Verified

Management share change, pay gap, and future performance of the enterprise

Variables	Management overconfidence			Non-management overconfidence

	Coefficient	Significance	VIF	Coefficient	Significance	VIF
Constant	−3.425^***	0.000		−5.097^***	0.000
Megap	0.125^**	0.004	1.214	0.164^***	0.000	1.242
Growth	0.052	0.0281	1.046	0.108^*	0.023	1.059
Tech	−0.001	0.561	1.285	−0.001	0.729	1.154
Lever	−0.386^*	0.041	1.767	−0.908^***	0.000	1.521
Size	0.101^*	0.015	1.948	0.158^***	0.000	1.879
SOE	0.022	0.739	1.136	0.093^*	0.040	1.204
Ind	1.886	1.000	1.209	0.052	0.333	1.105
R²		0.098			0.132
F		3.646^***			20.319^***
Change in R²		0.098^**			0.132^***

Industry distribution of samples

Industry code	Industry type	Number of firms	Percentage
B	Mining	30	2.5
C	Manufacturing	933	78.5
D	Electricity, heating, gas, and water production and supply	18	1.5
E	Construction	29	2.4
F	Wholesale and retail trade	34	2.9
G	Transportation, warehousing, and postal services	13	1.1
H	Accommodation and catering	1	0.1
I	Information transmission, software, and information technology	80	6.7
K	Real estate	12	1
L	Leasing and business services	9	0.8
M	Scientific research and technology	9	0.8
N	Water conservatory, environment, and public facilities management	6	0.5
P	Education	1	0.1
Q	Health and social work	2	0.2
R	Culture, sports, and entertainment	12	1

Variables involved in descriptive statistics

Variable	Full sample
Variable	Average	Medium	Standard deviation	Minimum value	Maximum value
EPS	0.32	0.21	0.63	−3.12	14.27
Megap	13.26	13.22	0.65	10.75	16.09
Share	0.11	0.01	0.16	0.00	0.70
Duality	0.24	0.00	0.43	0.00	1.00
Overcon	0.20	0.00	0.40	0.00	1.00
Growth	0.22	0.12	0.47	−0.38	8.55
Tech	14.23	11.29	12.97	0.00	85.53
Lever	0.43	0.41	0.19	0.04	1.04
Size	22.39	22.24	1.12	19.21	27.83
SOE	0.41	0.00	0.49	0.00	1.00
Ind	0.78	1.00	0.41	0.00	1.00

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

Article Category: Empirical Paper

Published Online: Dec 31, 2019

Page range: 287 - 318

Received: Feb 18, 2019

Accepted: Dec 20, 2019

DOI: https://doi.org/10.2478/ijme-2019-0025

Keywords
China, pay gap, performance, firm, managerial power, managerial overconfidence

© 2019 Ping Liu et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Figure 1

Figure 2

Figure 3

Executives holding two posts, pay gap, and future performance of the enterprise

Common metrics used for management authority

Pearson’s correlation factor among the relationship between the variables

Adjustment effect for the executive shareholding ratio

Variable tools

Common metrics used for managerial overconfidence

Executive ownership ratio, pay gap, and future performance of the enterprise

Common metrics for executive pay

Common metrics for employee compensation

Common measures for future performance of domestic (Chinese) firms

Descriptive statistics of dependent (EPS) and independent variables (Megap)

Validation of hypotheses

Management share change, pay gap, and future performance of the enterprise

Industry distribution of samples

Variables involved in descriptive statistics

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

Article Category: Empirical Paper

Published Online: Dec 31, 2019

Page range: 287 - 318

Received: Feb 18, 2019

Accepted: Dec 20, 2019

DOI: https://doi.org/10.2478/ijme-2019-0025

KeywordsChina, pay gap, performance, firm, managerial power, managerial overconfidence

© 2019 Ping Liu et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Figure 1

Figure 2

Figure 3

Executives holding two posts, pay gap, and future performance of the enterprise

Common metrics used for management authority

Pearson’s correlation factor among the relationship between the variables

Adjustment effect for the executive shareholding ratio

Variable tools

Common metrics used for managerial overconfidence

Executive ownership ratio, pay gap, and future performance of the enterprise

Common metrics for executive pay

Common metrics for employee compensation

Common measures for future performance of domestic (Chinese) firms

Descriptive statistics of dependent (EPS) and independent variables (Megap)

Validation of hypotheses

Management share change, pay gap, and future performance of the enterprise

Industry distribution of samples

Variables involved in descriptive statistics

Keywords
China, pay gap, performance, firm, managerial power, managerial overconfidence