Pay dispersion and bank performance: the role of culture and law

Yu, Ellen Pei-yi and Luu, Bac Van (2016) Pay dispersion and bank performance: the role of culture and law. Working Paper. Birkbeck College, University of London, London, UK. (Unpublished)

Abstract

We examine the impact of executive pay dispersion on firm performance and valuation in a global sample of banks. The pay dispersion variable is measured using our hand-collected dataset comprised of banks chosen from OECD countries and banks from China and India. Controlling for cultural differences across countries using Hofstede’s four cultural dimensions, we test whether the equity fairness (favouring smaller pay dispersion) or tournament theory (arguing for higher pay dispersion) are better descriptions of the relationship between pay dispersion and performance. We find that the equity fairness theory prevails in most sub-groups of our sample, with the exception of Common Law developed country banks, where there is no significant relationship between pay dispersion and performance or valuation. With regard to the cultural variables, we find for our sample banks in Developed Countries that Individualism is positively associated with market valuation while Uncertainty Avoidance has a negative effect.

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