Homophily Exclusion or Homophily Preference? The Influence of the Executive Identity of Nonexecutive Directors on the Focal Firm Executive Pay and Ordinary Employee Pay

Abstract

Abstract The occupational identity of nonexecutive directors exerts a considerable influence on their way of designing and distributing executive pay as well as ordinary employee pay in the focal firm. Integrating the status characteristics theory into the corporate governance literature, I theorize that status contest effect comes into play in the process of setting executive pay in the focal firm, specifically when its nonexecutive directors serve as executives on stakeholders. More often than not, such executive identity triggers the status competition with focal firm executives, which motivates nonexecutive directors to reduce the focal firm executive pay so as to secure and aggrandize their own status within the focal firm. However, since ordinary employees pose no threat to nonexecutive directors in the focal firm, they tend to increase ordinary employee pay. Basing upon the empirical test which adopts the data of China’s Shanghai and Shenzhen A-share listed firms, I find that the greater the focal firm’s nonexecutive director ratio, the less will be the top executives’ pay in the focal firm; the greater the focal firm’s nonexecutive director ratio, the greater will be ordinary employees’ pay in the focal firm; the greater the focal firm’s nonexecutive director ratio, the smaller will be the pay gap between top executives and ordinary employees in the focal firm. In addition, I also find that ownership power and gender can moderate the relationship between nonexecutive director ratio and executive pay: top executive ownership can alleviate the negative relationship between focal firm’s nonexecutive directors and top executives’ pay; female nonexecutive directors are more likely to increase focal firm’s ordinary employee pay than their male counterparts.