The Impact of Executive External Pay Disparity on Enterprise Innovation: Evidence from Mixed-Ownership Enterprises in China

Abstract

ABSTRACT Reasonable compensation contract arrangements have long been an essential means of promoting the hard work of executives and enhancing corporate performance. While internal pay disparity and its incentive effects have garnered widespread attention, few studies have examined the impact of executive external pay disparity on enterprise innovation. Using panel data from Chinese mixed-ownership listed companies spanning from 2013 to 2020, this study explores how executive external pay disparity affects enterprise innovation. Our findings demonstrate that enterprise innovation is positively influenced by the disparity in executive external pay. This facilitating role is further strengthened in enterprises with a high level of board governance. Additionally, the benefits of executive external pay disparity for innovation are particularly evident in general commercial mixed-ownership enterprises. Mechanism tests reveal that executive external pay disparity plays a pivotal role in enhancing enterprise innovation by increasing corporate risk-taking, ultimately leading to improved enterprise value. This study not only enriches our understanding of the influencing factors behind enterprise innovation from a new perspective but also holds significant implications for deepening the reform of mixed ownership and promoting enterprise innovation through the optimization of compensation contract arrangements.