Political promotion and pay gap: Evidence from SOEs in China

Abstract This paper investigates how CEO political promotion incentive affects the within-firm pay gap in SOEs of China. We find that CEO political promotion significantly reduces the within-firm pay gap. This effect is pronounced for SOEs with good past performance, without political connection, with a CEO who could be promoted to important duty, or with a female CEO. Further test shows that CEO power is one of the influencing mechanisms of the effect of political promotion on within-firm pay gap. Lastly, additional tests and a placebo test show that our findings are robust after eliminating the effect of measurement methods of within-firm pay gap or CEO political promotion incentives, the effect of local government, or the effect of time trend and endogeneity. Overall, this study sheds light on the corporate compensation policy from the perspective of the political career concerns of CEOs in China.