Political Connections, Ownership and Within-Firm Pay Gap

Abstract

The difference in wages between executives and employees reflects the class conflict in corporate governance. To investigate the political factors within the practice of corporate governance related to employees, this paper empirically tests the relationship among political connections, ownership and within-firm pay gaps. We take the A-share listed companies on the Shanghai and Shenzhen Stock Exchange as the example, design hypothesis tests and examine the effects of political connections on the pay gap in two distinctive groups of companies, the state-owned enterprises (SOEs) and the non-stated-owned enterprises (non-SOEs). The overall result indicates that political connections increase the average salary of executives and decrease the average salary of employees, thereby expanding the within-firm pay gap. Pay gaps in companies with political connections are 16% higher than companies without political connections. The further test results of distinguishing property rights show that in non-SOEs, political connections increase the executives’ compensation and decrease the average compensation of employees, resulting in an increase of the within-firm pay gap. Similar relationships appear in SOEs but without statistical significance. These findings expand the research on income distribution effects of political connections theoretically, and provide useful insights for SOEs’ reform and income distribution system reform in practice.