Relative pay and its effects on firm efficiency in a transitional economy

In this study, we examine the impact of top management pay and relative pay (manager pay divided by average worker pay) on a firm‘s productivity. We use data from China, which is an interesting setting for our research as it is transitioning from a centrally planned economy with professed egalitarian pay to a free market system, albeit with socialist characteristics. We find that top management pay is positively associated with high productivity while relative pay is negatively associated. Our results provide support for the view that workers are alienated when their incomes are far lower than that of top management and this leads to lower productivity. This effect is most pronounced in labor intensive firms. We also find some evidence that the negative impact of relative pay on a firm‘s productivity is reduced in private controlled listed