Chairperson collectivism and the compensation gap between managers and employees: Evidence from China

• DOI: http://doi.org/10.1111/corg.12278
• Author: Bingxuan Lin,Wei Jiang,Yunguo Liu,Yue Xu
• Published date: 01 July 2019
• Date: 01 July 2019

ORIGINAL ARTICLE

Chairperson collectivism and the compensation gap between

managers and employees: Evidence from China

Wei Jiang

1

|Bingxuan Lin

2,3

|Yunguo Liu

3

|Yue Xu

4

1

Department of Accounting, School of

Management, Center for Management

Accounting Research, Jinan University,

Guangzhou, China

2

College of Business Administration,

University of Rhode Island, Kingston, Rhode

Island

3

Center for Accounting, Finance and

Institutions, Business School, Sun Yat‐sen

University, Guangzhou, China

4

Department of Finance, Lingnan (University)

College, Sun Yat‐sen University, Guangzhou,

China

Correspondence

Yue Xu, Department of Finance, Lingnan

(University) College, Sun Yat‐sen University,

No. 135, West Xingang Road, Guangzhou

510275, China.

Email: xuyue5@mail2.sysu.edu.cn

Funding information

National Natural Science Foundation of China,

Grant/Award Numbers: 71790603, 71312150,

71872187, 71572197 and 71572068

Abstract

Research Question/Issue: Few studies have examined the determinants of the

compensation gap between managers and workers, despite the significant public

attention the issue has received. In particular, few studies have examined how

nations' formal systems, such as their institutional and legal arrangements, and infor-

mal systems, such as their cultures and traditions, affect the compensation gap. We

use the chairperson's native place of origin as a proxy for cultural differences within

China and examine how chairperson collectivism affects compensation gaps between

managers and average workers.

Research Findings/Insights: The results show that the compensation gap in a com-

pany run by a chairperson from a collectivistic culture tends to be smaller than that of

a company run by a chairperson from an individualistic culture. This effect tends to be

stronger if a chairperson has a longer tenure and works in a state‐owned enterprise or

in a firm located in collectivistic regions.

Theoretical/Academic Implications: The study provides new insights into the

determinants of the compensation gap by incorporating the cultural traits of manage-

ment. It also broadens the understanding of compensation gaps in emerging markets

and shows that cultural differences play an important role in understanding the com-

pensation gap in China.

Practitioner/Policy Implications: Cultural characteristics should be taken into

account when developing compensation contracts. Stakeholders need to consider

alternative mechanisms, such as higher pay for performance, to counteract the higher

compensation gap due to differences in cultural preferences.

KEYWORDS

Corporate governance, collectivism, compensation gap, culture, individualism

1|INTRODUCTION

The widening compensation gap between chief executive officers

(CEOs) and workers has attracted significant attention in recent years

(Cingano, 2014; Ostry, Berg, & Tsangarides, 2014). The average com-

pensation gap in the United States increased from 125 times in 1992

to more than 380 times in 2012 (Mishel & Sabadish, 2012). This phe-

nomenon is not unique to the United States, and the pay gaps

between managers and workers are increasing worldwide.

1

Researchers have used tournament theory, management power

theory, and social comparison theory to explain compensation gaps

and their effects on firm performance. These studies have mainly

Received: 25 August 2018 Revised: 15 February 2019 Accepted: 15 February 2019

DOI: 10.1111/corg.12278

Corp Govern Int Rev. 2019;27:261–282. © 2019 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg 261

examined the determinants and economic consequences of pay dis-

persion among managers (Chen, Huang, & Wei, 2013; Kale, Reis, &

Venkateswaran, 2009; Kini & Williams, 2012; Vieito, 2012) and the

effect that the compensation gap between managers and workers

has on firm performance (Cheng, Smith, & Tanyi, 2014; Crawford, Nel-

son, & Rountree, 2014; Faleye, Reis, & Venkateswaran, 2013; Mohan,

Norton, & Deshpande, 2015). However, few studies have examined

the determinants of the compensation gap between managers and

workers (Hyun, Kang, Kim, & Shin, 2012), despite the significant

public attention the issue has received.

2

To date, few studies have

examined how nations' formal systems, such as their institutional

and legal arrangements, and informal systems, such as their cultures

and traditions, affect the compensation gap (Connelly, Tihanyi, Crook,

& Gangloff, 2014).

Prior literature documents that culture affects individual beliefs

and preferences and thus economic outcomes (Alesina & Giuliano,

2015; Guiso, Sapienza, & Zingales, 2006).

3

Because of the difficulties

in changing culture and culture's low depreciation rate, culture is

largely considered to comprise “given”traits that are associated with

individuals throughout their lifetimes (Becker, 1996) and that directly

affect individual behavior. In cultures dominated by individualism,

people tend to emphasize individual success and independence

and often put individual goals ahead of organizational goals (Fiske,

Kitayama, Markus, & Nisbett, 1998; Singelis, Triandis, Bhawuk, &

Gelfand, 1995). In collectivistic cultures, the relationship between indi-

viduals and organizations is strongly emphasized, and the cooperation

between group members and their harmonious relationships with one

another are prioritized over many other individual objectives. In collec-

tivistic cultures, individuals are expected to place the group's interests

over their own (Carpenter, 2000; Kulkarni et al., 2010). Cross‐country

studies using country‐level measures of the individualism–collectivism

index developed by Hofstede (1980, 2001) have explored how indi-

vidualistic and collectivistic cultures affect corporate accounting and

financial policies (Chui, Titman, & Wei, 2010; Guiso, Sapienza, &

Zingales, 2015; Kanagaretnam, Lim, & Lobo, 2011, 2014) and even

economic development (Gorodnichenko & Roland, 2010, 2011). In this

study, we examine the effect of the individualism–collectivism dichot-

omy on the compensation gap between managers and employees.

Studies using cross‐country data have shown that cultural differ-

ences may explain the cross‐sectional differences in CEO compensa-

tion and salary gaps (Grenness, 2011; Tosi & Greckhamer, 2004).

However, these studies are difficult to interpret because institutional

differences, such as the differing levels of legal enforcement, taxation,

and disclosure quality, may bias the findings. The underlying assump-

tion is that all managers residing in the same nation display the same

cultural traits.

4

In addition, some of these studies are simply a correla-

tion study rather than a causality study, and thus, some of the findings

are difficult to explain (Grenness, 2011).

China provides a good setting to examine the effects of individual-

ism and collectivism at the microlevel. Following the classification

developed by Hofstede (1980, 2001), China is a typical example of a

collectivistic culture, although China also has a long history of main-

taining its diverse regional cultural traits. The Yellow River Basin and

Yangtze River Basin areas are marked by the distinctive cultural traits

of the North and the South. Although the differences in personal traits

in these regions are well known, it was not until recently that Talhelm

et al. (2014) proposed “rice theory,”which posits that collectivism is

more prevalent in the South, whereas individualism is more common

in the North as a result of the differences in regional agricultural pro-

duction in the past. Rice and wheat have been farmed in these regions

for thousands of years, and the cultural traditions relating to the culti-

vation of rice and wheat have been passed down through the ages,

even though most people have since abandoned farming (Talhelm

et al., 2014). Due to specific farming, irrigation, and harvesting needs,

over time, people from the rice‐growing regions have become more

likely to display traits of collectivism, whereas people from the

wheat‐growing regions have become more likely to be individualistic.

Because China is ethnically and politically unified, these cross‐

sectional differences allow us to examine the effect of collectivism

on the pay gap between top managers and employees in various firms

within the country as a whole.

5

Another important focus of this study is the growing concern over

the widening pay gap in China (Firth, Leung, Rui, & Na, 2015; Yang &

Wang, 2014). Before opening its economy to the world in 1978, China

was a centrally planned economy, and the compensation of state‐

owned enterprises (SOEs) was extremely compressed. However, in

recent decades, because China embarked on its transition to a market

economy, the rewards system reform has become a fundamental com-

ponent of the economic reform, and companies are increasingly

implementing dispersed wage structures that link wages to individual

and firm performance (Ding, Akhtar, & Ge, 2009). Although the pay

gap in China is still lower than that in the United States and other

developed countries, the level of public concern has become more

noticeable. In response to the increasing criticism directed toward

the managers of SOEs, the Chinese government issued a series of reg-

ulations and set a pay ceiling for top managers of SOEs.

In this study, we examine how the collectivistic traits of chairper-

sons affect the compensation gap between managers and workers in

China. Given the major leadership role that a chairperson plays in a

company, she is in a unique position to dispense her acquired knowl-

edge and skills through her control of the board meeting agenda and

through close communication with the CEO and other board members

(Krause, Semadeni, & Withers, 2016; Withers & Fitza, 2017). We use

the chairperson's native place of origin in Southern (Northern) China

as a proxy for her personal collectivism (individualism) and find that

the compensation gap is significantly narrower in firms whose chair-

persons come from regions characterized by higher levels of collectiv-

ism than in firms whose chairpersons come from regions characterized

by higher levels of individualism. Moreover, the negative effect of

collectivistic culture on the compensation gap is stronger if the chair-

person has a longer tenure or works in an SOE or in a firm located in a

collectivistic region. Finally, we show that the smaller compensation

gap comes mainly from higher compensation for average employees

rather than changes in management compensations. Our findings are

robust under various specifications and highlight the importance of

the within‐country variations in cultural dimensions.

262 JIANG ET AL.