AJIBM  Vol.8 No.9 , September 2018
Optimal Executive Compensation Dispersion and Product Market Structure
Abstract: Executive compensation is considered as one of the most crucial issues for the corporate governance. The proper executive compensation dispersion can be employed to motivate the top managers and then to boost the firm performance, but the definition of “proper” varies in the existing literature. The bigger dispersion is better for firm performance based on Tournament Theory but smaller one is better according to some other theories. In this paper, we try to theoretically study the optimal executive compensation by considering the internal and external situation of the firm at the same time, especially the influence of product market. We find the optimal compensation dispersion will increase (decrease) if more (less) firms enter the market when the cost of sabotage increases more rapidly than the cost of effort, vice versa. The findings imply the firm should increase (decrease) the compensation dispersion if the intensity of competition in product market decreases (increases) when sabotage is expensive and the firm should increase (decrease) the compensation dispersion if the intensity of competition in product market increases (decreases) when sabotage is cheap.
Cite this paper: Chen, D. , Chiang, S. and Li, Y. (2018) Optimal Executive Compensation Dispersion and Product Market Structure. American Journal of Industrial and Business Management, 8, 2052-2060. doi: 10.4236/ajibm.2018.89135.

[1]   Mengistae, T. and Xu, L.C. (2004) Agency Theory and Executive Compensation: The Case of Chinese State-Owned Enterprises. Journal of Labor Economics, 22, 615-637.

[2]   Dong, X.Y. (2005) Wage Inequality and Between-Firm Wage Dispersion in the 1990s: A Comparison of Rural and Urban Enterprises in China. Journal of Comparative Economics, 33, 664-687.

[3]   Korzec, M. (1992) Labor and the Failure of Reform in China. St. Martin’s, New York.

[4]   Appleton, S., Song, L. and Xia, Q. (2005) Has China Crossed the River? The Evolution of Wage Structure in Urban China during Reform and Retrenchment. Journal of Comparative Economics, 33, 644-663.

[5]   Lin, Y.F., Liao, Y.C. and Chang, K.C. (2011) Firm Performance, Corporate Governance and Executive Compensation in High-Teck Business. Total Quality Management, 2, 159-172.

[6]   Lazear, E.P. and Rosen, S. (1981) Rank-Order Tournament as Optimum Labor Contracts. Journal of Political Economy, 89, 841-864.

[7]   Main, B., Charlys, G.M., O’Reilly, A. and Wade, J. (1993) Top Executive Pay: Tournament or Teamwork? Journal of Labor Economics, 11, 606-628.

[8]   Eriksson, T. (1999) Excutive Compensation and Tournament Theory: Empirical Tests on Danish Data. Journal of Labor Economics, 17, 262-280.

[9]   Bognanno, M. (2001) Corporate Tournaments. Journal of Labor Economics, 19, 290-315.

[10]   Conyon, M.J., Peck, S.I. and Sadler, G.V. (2001) Corporate Tournaments and Executive Compensation: Evidence from the U.K. Strategic Management Journal, 22, 805-815.

[11]   Lazear, E.P. (1989) Pay Equality and Industrial Politics. Journal of Political Economy, 97, 561-580.

[12]   Chen, D. (2014) Executive Compensation Dispersion, Product Market Strucuture and Firm Performance. Chinese Social Science Publishing, Beijing.

[13]   Lin, M.-J. (2008) External Market Condition and Tournaments-Theory and Evidence. Economic Letters, 99, 75-78.

[14]   Cardullo, G. (2011) The Distributive and Welfare Effects of Product and Labour Market Deregulation. Labour Economics, 18, 205-217.

[15]   Chen, D. and Zhang, S. (2010) The Study on The Inverse-U Shaped Relationship between Wage Gap and Firm Performance—Theoretical Model and Empirical Exploration. Nankai Economics Review, 5, 35-45.