The Executive Compensation Gap Impact towards Company Performance and Moderating Effect of Ownership Concentration: Empirical Evidence in China

The Executive Compensation Gap Impact towards Company Performance and Moderating Effect of Ownership Concentration: Empirical Evidence in China

Irfah Najihah Basir Malan*

Faculty of Business and Management, Universiti Teknologi MARA, Cawangan Melaka, Kampus Bandaraya Melaka, 75350, Melaka, Malaysia

DOI: https://dx.doi.org/10.47772/IJRISS.2025.908000570

Received: 12 August 2025; Accepted: 21 August 2025; Published: 20 September 2025

ABSTRACT

The study examines the impact of the executive compensation gap on company performance and moderating effect of ownership concentration for China’s listed technology companies. Data are collected from CSMAR database during 2010-2021, empirical analysis is utilized using Stata. The results reveal that the executive compensation gap has significantly positive impacts on company performance, while ownership concentration has a partially negative moderating effects on the relationship between the executive compensation gap and company performance. The study provides new insights into the current research practice. It is imperative to consider expanding the executive compensation gap and enhance the compensation design system.

Keywords: Executive compensation gap, company performance, ownership concentration, China listed technology companies

INTRODUCTION

It is vital to consider the impact of compensation gap on company performance when studying executive compensation (Gao, 2020; Wang, 2021). In this context, this study will examine the possible effects of executive compensation gap on company performance with executive compensation gap as the dependent variable. Executives are the executors of corporate decisions, while shareholders are the actual owners of the company. Executives are responsible to shareholders, therefore, shareholder structure and behavior will have an impact on executives (Zhang, 2022). In the five-year plan for the development of China’s national economy, the government proposes to optimize the ownership structure of listed companies in China and improve their operating efficiency and profitability (Ma, Wang & Ma, 2022). As China is a socialist country with a large number of state-owned enterprises and a high degree of ownership balance between major shareholders and minor shareholders in non-state-owned enterprises, while state-owned enterprises are often controlled by major shareholders, there is a big difference in equity concentration of listed companies in China (Liu, 2019). Therefore, this study included ownership concentration into the research scope and observed its possible moderating role between executive compensation gap and company performance of listed companies in China.

Although the technology sector is growing rapidly, the technology market in China is currently not mature enough, most of it is still in the growth phase, and is currently facing the pressure of technology iteration brought by the trade war between China and the United States (Apcho-Ccencho et al., 2021). Therefore, the distribution of executive compensation in the technology industry is more worthy of attention, because there is now facing technological development pressure and fierce competition in the industry, and the Chinese government has proposed to vigorously support the development of the technology industry in its development plan, and in order to survive from the pressure, it is necessary to establish a stable management team to promote the company’s business performance (Qian, 2014). Zhou (2020) also affirms the attention to the compensation of the management team importance for the development of the technology industry, compared with traditional industries, listed companies in the technology industry often have higher requirements for teamwork, which also puts forward higher requirements for the work of executives, under the system of separation of the company’s operating rights and ownership, how to deal with the contradiction between the shareholders and the executives, to establish an incentive mechanism for the executives, and to combine the executive compensation system with the company’s performance effectively, so as to improve the listed companies in the technology category performance has become a realistic and urgent issue, so more research based on the science and technology industry is needed at present. Thus, the aim of this study is to use empirical research and building empirical models to examine the impact of executive compensation gap on company performance and the moderating effect of ownership concentration in the technology sector in China.

LITERATURE REVIEW

When conducting research related to executive compensation gap, it is important to pay attention to the specific context in which the companies are located, and the extent to which the executive compensation gap affects the performance of the company may also be different in different contexts, so it is also important to consider the situational variables as the moderator variables and include them in the discussion (Xia and Dong, 2014). Modern principal-agent theorists have expanded the content of such theory and proposed that, in addition to the agency problem between shareholders and executives, there is also an agency problem among shareholders, which is due to the fact that when there is a difference in shareholding ratios among shareholders, conflicts of interest may also arise between the dominant large shareholders and small and medium-sized shareholders, at which time the large shareholders of the company control the board of directors and the company’s operation and management, which leads to an imbalance in the governance structure of the company, a lack of effective supervision to the detriment of small and medium shareholders, and this type of agency problem is particularly common in listed companies in emerging economies, such as China, Thailand, etc. (Al Farooque, Buachoom and Sun, 2020; Akben-Selcuk, 2019).

However, at present, researchers have not paid too much attention to the regulatory effect of ownership concentration on executive incentives, and more researchers regard ownership concentration as an independent variable to study its direct impact on company performance (e.g. Shahrier, Ho & Gaur, 2020; Iwasaki & Mizobata, 2020). Although a study conducted by Ali, Hussain & Waheed (2021) used listed companies in China as a sample found that there is a significant positive correlation between executive compensation and corporate performance, and there is also a significant positive correlation between executive compensation and ownership concentration. Although it is confirmed at a glance that executive compensation, corporate performance and ownership concentration are interrelated in China’s listed companies, there is a lack of research on the moderating effect of ownership concentration on the relationship between executive compensation and corporate performance. Nie (2019) argues that executives are employed by shareholders and are responsible to shareholders, so if the ownership concentration is too high, large shareholders may intervene in the behavior of executives due to overconfidence and excessive power, affecting the company’s decision-making and operation, and decreasing the positive impact of executive compensation incentives on the company (Zhang, 2022). Therefore, after taking into account the actual situation of listed companies in China and the views of principal-agent theorists on the agency problem of shareholders, this study includes ownership concentration as a moderating factor in the scope of the study.

This study proposes the following hypotheses:

Hypothesis 1: The executive compensation gap can have a positive effect on company performance.

H1a-The CEO-non-CEO vertical compensation gap has a significant positive effect on company performance of listed technology companies in China.

H1b-The non-CEO-employees vertical compensation gap has a significant positive impact on company performance of listed technology companies in China.

H1c-The executive-industry horizontal compensation gap has a significant positive effect on company performance of listed technology companies in China.

Hypothesis 2: The ownership concentration negatively moderates the relationship between executive compensation gap and company performance in listed companies in the technology sector in China.

H2a- The ownership concentration negatively moderates the relationship between CEO-non-CEO compensation gap and company performance in listed companies in the technology sector in China.

H2b- The ownership concentration negatively moderates the relationship between non-CEO-employee compensation gap and company performance in listed companies in the technology sector in China.

H2c-The ownership concentration negatively moderates the relationship between CEO-industry compensation gap and company performance in listed companies in the technology sector in China.

METHODOLOGY

The conceptual framework of this study is shown in Figure 3.1, this diagram shows the relationship between the concepts of this study, the executive compensation gap is divided into two aspects: vertical gap and horizontal gap, to apply the concept to research, the vertical compensation gap is further divided into the gap between CEOs and non-CEOs, and the gap between executives and employees, and the horizontal compensation gap is the gap between the CEOs and the average of the industry, and to study the impact of the executive compensation gap on the company performance, the company performance is represented by financial market performance, EVA is used as the measure, and ownership concentration is the moderating variable to test its moderating effect between the independent and dependent variables.

Conceptual Framework

Figure 3.1 The conceptual framework

FINDINGS

Descriptive Analysis

Table 4.1 shows the descriptive statistical results. It can be seen from the table that the average compensation gap between CEOs and non-CEOs is 12.21, and the average compensation gap between non-CEOs and employees is 12.68. The standard deviation of the compensation gap between CEOs and non-CEOs is 1.22, which is larger than the standard deviation of the compensation gap between non-CEOs and employees of 0.88. The ratio method is adopted to measure the industry compensation gap. A data value greater than 1 indicates that the compensation gap of sample CEOs is higher than the industry average level, and a data value less than 1 indicates that the compensation gap of sample CEOs is lower than the industry average level. The closer the ratio is to 1, the smaller the horizontal gap is, and the mean and median of the horizontal compensation gap of CEO industry are 1.02 and 0.74. This indicates that a considerable part of the CEO compensation samples is still lower than the average level of the industry, and the maximum value of this variable is 38.37, and the minimum value is only 0.02, this difference indicates that there is a very obvious horizontal compensation gap among the executives of different companies in China’s technology industry.

The dependent variable of this study is company performance, which refers to economic value added (EVA). As can be seen from the table, in the sample data, the value of this value ranges from -1.69-0.66, which indicates that there are still differences in the performance of companies in China’s technology industry, companies with positive and negative growth in performance coexist. The average and median values are 0.02 and 0.01 respectively, which indicates that from the perspective of the industry, companies with positive and negative growth in performance still exist. EVA generally shows a positive growth trend, but there is still room for further growth.

Ownership concentration is not only a control variable, but also a moderator variable in this study which measured by the total holdings of the top three shareholders of a company, the value of this variable ranges from 0 to 100, and the closer it is to 100, the higher the ownership concentration, and the closer it is to 0, the higher the dispersion. As can be seen from the table, the minimum value of ownership concentration is only 5.63, while the maximum reaches 91.65, with a gap of 86.02 and a standard deviation of 14.60, which means that the data of ownership concentration within China’s technology industry is highly volatile.

Table 4.1 The descriptive analysis of main variables

Regression Analysis

The regression results of the impact of executive compensation gap on company performance are shown in Table 4.2. After controlling the time and individual effects and relevant control variables, it can be seen that CEO-non-CEO compensation gap has a positive impact on company performance EVA (β=0.00325), which is significant at 5% level, indicating that there is a significant positive correlation between the two, so the results support the view of hypothesis H1a. Similarly, the compensation gap between non-CEOs and employees also has a positive impact on company performance (β=0.0157), which is significant at 1% level, indicating that there is also a significant positive correlation between the two, supporting the H2b view (Zang, 2020).

In addition to the vertical compensation gap, this study also innovatively puts forward the concept of horizontal compensation gap from the perspective of industry average. After introducing control variables, it is found that CEO-industry compensation gap also has a positive impact on company performance (β=0.00362), which is significant at 5% level. Thus, the hypothesis of H2c is also supported (Zang, 2020).

As can be seen from the above analysis, assuming that H2a, H2b and H2c are all proved to be true, the results are consistent with the viewpoints of the competition theory, and it can be concluded that in China’s listed companies in the technology industry, the executive compensation gap has a significant positive impact on company performance.

Table 4.2 The regression results of the impact of executive compensation gap on company performance

*, ** and *** are significant at the confidence level of 10%, 5% and 1% respectively, and the robust standard error is in brackets

In addition to the impact of executive compensation gap on company performance, this study also focuses on the possible moderating effect of ownership concentration between the two. The Table 4.3 shows the result of the moderating effect analysis. Similarly, after controlling the time and individual effects and introducing control variables, it can be seen that the coefficient of the cross multiplier of CEO-non-CEO compensation gap and ownership concentration is -3.10e-05, and the coefficient shows a negative moderating effect, but the P-value is not significant in this model, which indicates there is no evidence to prove the existence of negative moderating effect, which is inconsistent with the expected result. Thus, the H2a is rejected. However, the cross-multipliers of the non-CEO-employee compensation gap and ownership concentration have negative coefficients (β=-0.000426) and is significant at the 1% level, which is consistent with the expected result, thus proving that H2b is valid. In addition, the cross-multiplier coefficient of CEO-industry compensation gap and ownership concentration is negative (β=-0.000155) and significant at 1% level, which is consistent with the expected result and proves that H2c is also valid (Singh & Misra, 2021).

From the above analysis, it can be concluded that this study supports H2b and H2c, but rejects H2a. The moderating effect of ownership concentration on the relationship between CEO-non-CEO compensation gap and company performance does not exist, but ownership concentration negatively moderates the relationship between executive-employee and executive-industry executive compensation gap and company performance of listed companies in China’s technology sector.

Table 4.3 The moderating effect of ownership concentration of impact of executive compensation gap on company performance

*, ** and *** are significant at the confidence level of 10%, 5% and 1% respectively, and the robust standard error is in brackets

CONCLUSION AND RECOMMENDATIONS

This study empirically studied the relationship between executive compensation gap and company performance, and the moderating effect of ownership concentration by collecting the data of Chinese technology industry bosses. The research results show that, for technology industry, the executive compensation gap have a significant positive impact on company performance. Besides, the ownership concentration partially negatively moderates the relationship between executive compensation gap and company performance, in except the CEO-non-CEO compensation gap, an increase in ownership concentration weakens the positive impact of the executive compensation gap on company performance.

Based on the research conclusions, this study puts forward the following recommendations. First, listed companies in China’s technology industry should set a reasonable executive compensation gap and further improve the compensation design system. It can be seen from the research results that the horizontal and vertical compensation gap of executives has a significant promoting effect on the improvement of company performance. For Chinese listed companies in the technology industry, in order to further improve corporate performance, it is not only necessary to pay attention to the compensation gap between CEOs and non-CEOs, and between executives and ordinary employees, but also to appropriately expand the compensation gap between executives and their peers in the same industry (Wang, 2020). Secondly, improving the internal ownership structure of listed companies, appropriately reduce ownership concentration and improve ownership balance. The moderate reduction of ownership concentration in China’s listed technology companies can not only alleviate agency problems caused by shareholder conflicts, but also prevent shareholders from excessively interfering with executives’ investment decisions in the operation process, thereby constraining shareholders’ behaviors and strengthening the role of compensation incentives on corporate performance (Wang, 2020). Moreover, to enhance the robustness and credibility of the findings, future research could examine issues related to causality and potential endogeneity by employing advanced econometric approaches such as fixed-effects models with instrumental variables or the Generalized Method of Moments (GMM). In addition, as the present study is limited to China’s technology sector without comparative evidence across other industries, the extent of generalizability remains restricted. Therefore, subsequent studies may consider extending the analysis to a wider range of sectors.

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