Vertical pay disparity, traditional Chinese culture, and employee productivity

Abstract

We examine how traditional Chinese culture interplays with pay disparity to affect employee productivity. In particular, we leverage an exogenous regulatory reform in Chinese state-owned enterprises (SOEs) to reduce vertical pay disparity (i.e., the difference between executive and average employee pay within a firm). Our results show that in a cultural context characterized by high levels of power distance and masculinity, a sudden reduction in vertical pay disparity is accompanied by a notable decline in employee productivity. Furthermore, the decline in productivity is more pronounced when employees are exposed to greater cultural traditionality. We also show that executive compensation d..