Abstract

This study examines the association between a foreign director and executive－employee pay disparity. This study also investigates the relationship between pay disparity and firm performance, and whether a foreign director affects the relationship. Using KOSPI and KOSDAQ market listed firms belonging to family－controlled large business conglomerates (Chaebol) over the period from 2010 to 2014, we find that a foreign director is negatively associated with pay disparity. The results indicate that pay disparity is lower, reflecting lower bargaining power by executives, in firms with independent and effective boards that appoint foreign directors. In addition, we find the concave relationship between pay disparity and firm performance, suggesting that up to a certain level of pay disparity, the incentive effects dominate fairness considerations, but the such incentive effects are no longer in place beyond certain level as employees may feel relative deprivation. More importantly, we find the positive relationship between pay disparity and firm performance is strengthened in the firms with foreign directors. The results indicate that the incentive effects of pay disparity dominate feelings of inequity and relative deprivation among lower－level employees in these firms. Our study contributes to the literature on executive compensation and the monitoring role of board of directors. It also has regulatory implications on the role of foreign directors in determination of compensation structure and levels to effectively reduce agency problems and enhance firm value.

Keywords

• foreign directors
• board independence
• executive－employee pay disparity
• firm performance

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