Employee Directors and Internal Compensation Fairness: Evidence from China

The new Company Law effective July 2024 stipulates that limited liability companies and joint stock limited companies with more than 300 employees should have employee representatives on their boards of directors. Whether and how do employee directors in Chinese listed companies play their governance role? Based on data from listed companies spanning 2010 to 2022 and from the perspective of internal pay equity, this study empirically examines the governance effectiveness of employee directors. The findings reveal that the establishment of employee directors in listed companies, and a higher proportion of employee directors on the board, are associated with a smaller internal pay gap within enterprises. Mechanism analysis indicates that employee directors fulfill a decision-making function by increasing the likelihood of the board reviewing proposals related to employee protection, thereby raising employee compensation levels and narrowing the internal pay gap. However, the supervisory function of employee directors is not effectively exerted, as their impact on excessive executive compensation is insignificant.