Does CEO Power Influence the Sorting Effect of Vertical Pay Dispersion

Abstract

Vertical pay dispersion among executives affect not only executive efforts, but also voluntary executive turnover. The former refers to the executive incentive effect of vertical pay dispersion, and the latter the executive sorting effect of vertical pay dispersion.A large number of literature studies the executive incentive effect of vertical pay dispersion, but few literature studies the executive sorting effect of vertical pay dispersion. At the same time, with the gradual establishment of modern enterprise system of listed companies in China, CEO power of listed companies is increasing, and the phenomenon that CEOs use the power to seek personal gains for themselves is becoming increasingly common.The greater the CEO power is, the stronger the CEO’s control over the boards is, the less likely CEO is to be dismissed by the board because of poor firm performance, and the more likely CEO is to obtain a high level of compensation. The former reduces the probability of promotion of VPs, the latter increases the sensitivity of vertical pay dispersion for VPs, and they will affect the relationship between vertical pay dispersion and VPs voluntary turnover tendency. Therefore CEO power may also affect the sorting effect of vertical pay dispersion. Using the data of listed companies in China, and taking pay gap between CEO and VPs as vertical pay dispersion, this paper examines the effect of CEO power on the sorting effect of vertical pay dispersion. China is still in the economic transition period, and most of the listed companies are state-owned enterprises. Compared with non-state-owned enterprises, internal governance of state-owned enterprises is relatively imperfect. This paper examines whether there is a difference in the effect of CEO power of state-owned enterprises and non-state-owned enterprises on the sorting effect of vertical pay dispersion. At the same time, marketization process is an important external environmental factor that influences corporate governance. This paper also examines whether the effect of CEO power on the sorting effect of vertical pay dispersion is subject to the marketization process of the place where the listed company is located. This paper finds that: （1）the greater CEO power is, the greater the positive effect of vertical pay dispersion on the VPs voluntary turnover rate is, indicating that the greater CEO power is, the stronger the negative sorting effect of vertical pay dispersion on VPs is; （2）compared with non-state-owned enterprises , the positive effect of CEO power on the relationship between vertical pay dispersion and VPs voluntary turnover rate is greater in state-owned enterprises, implying that the negative sorting effect of vertical pay dispersion in state-owned enterprises is greater than that in non-state-owned enterprises; （3）the higher the marketization process is, the smaller the positive effect of CEO power on the relationship between vertical pay dispersion and VPs voluntary turnover rate is, implying that the higher the marketization process is, the smaller the positive effect of CEO power on the negative sorting effect of vertical pay dispersion is. Further study also shows that the greater CEO power is, the greater the effect of vertical pay dispersion on firm performance through VPs voluntary turnover rate is, indicating that CEO power aggravates the negative effect of vertical pay dispersion on firm performance through VPs voluntary turnover. The contributions of this paper are as follows: first, this paper expands the literature of the effect of CEO power on executive behavior. A large number of domestic and foreign literature studies the relationship between CEO power and executive compensation, corporate performance and so on. Different from the previous literature, this paper studies the effect of CEO power on the sorting effect of vertical pay dispersion, and finds that CEO power increases the negative sorting effect of vertical pay dispersion. So this paper provides a new perspective for how CEO power affects executive behavior. Second, this paper expands the literature of the economic consequences of the sorting effect of vertical pay dispersion. This paper finds that CEO power increases the negative effect of the sorting effect of vertical pay dispersion on firm performance, so it provides a new perspective for the economic consequences of the sorting effect of vertical pay dispersion.