Executive-employee pay gap and professor directors: Evidence from China

Abstract

This study investigates the impact of professor-directors on the executive-employee pay gap in public Chinese firms. University professors have a reputation for maintaining higher ethical standards, so there is a societal expectation that professor-directors will advocate for social responsibility. Failure to do so will incur reputational costs for professor-directors. Consistent with this view, we find that the executive-employee pay gap is negatively associated with the presence of professors on the board. Additional evidence suggests that the negative impact of professor-directors on the executive-employee pay gap is the result of higher employee salaries and lower executive compensation. Our findings are more pronounced in a strong governance setting where independent directors are more effective, namely after the launch of the anti-corruption campaign in China, in firms with a greater proportion of independent board members, and in more mature firms. Moreover, the influence of professor-directors is primarily seen in certain subgroups that have high reputation costs, such as those associated with esteemed institutions or younger individuals, and in subgroups with low inclination toward tournament theory, such as those specializing in science or without overseas education and experience. Our findings withstand numerous robustness tests, including an instrumental approach to address endogeneity concerns.