In the intricate landscape of China’s corporate governance, a compelling investigation has emerged focusing on the impact of Environmental, Social, and Governance (ESG) ratings on executive compensation structures and income disparities within firms. Recent empirical research sheds light on how ESG ratings influence wage distribution, particularly emphasizing gaps between executives and regular employees. This phenomenon, deeply intertwined with property rights, firm size, industry type, and competitive environment, unravels the complex dynamics driving internal pay inequalities across Chinese enterprises.
A foundational aspect of this discourse involves the differentiation between state-owned enterprises (SOEs) and their non-state counterparts. Since SOEs form the backbone of China’s public economy, they operate under stringent policy frameworks regulating compensation and wage disparities. This regulatory environment has led to restrained growth in executive pay within SOEs. For instance, following the implementation of governmental salary caps, many SOEs introduced internal salary limitation schemes effectively suppressing excessive executive remuneration. An analytical approach employing an interaction term between ESG ratings and enterprise ownership status reveals a significantly negative coefficient relating to pay gap expansion among SOEs. This empirical finding suggests that ESG improvements do not widen compensation disparities within SOEs, underscoring the efficacy of government-mandated salary restrictions as a control mechanism against overpayment.
Conversely, a striking divergence emerges when examining non-state-owned enterprises, where ESG ratings appear to exacerbate pay gaps substantially. The absence of comparable regulatory constraints permits a more pronounced correlation between higher ESG performance and increased income inequality. The implication is that enhanced ESG commitments, while ostensibly promoting corporate responsibility and sustainability, may inadvertently facilitate broader executive compensation differentials in the private sector, where market forces and governance models differ significantly from SOEs.
Size is another critical variable modulating the ESG-pay gap nexus. Larger firms inherently experience intensified principal-agent problems, a phenomenon where the interests of executives diverge sharply from those of shareholders and regular employees. The complexity and scale of these corporations hinder oversight and enable executives to leverage their positions for increased remuneration. Quantitative analysis incorporating an ESG and firm size interaction term confirms a robust positive relationship with pay gap widening. This pattern suggests that as enterprises scale, the amplification of compensation disparities linked to ESG ratings becomes more acute, reflecting challenges in aligning executive incentives with equitable wage structures amid evolving ESG frameworks.
The industrial milieu further complicates these dynamics. High-technology sectors, characterized by significant innovation demands and a workforce comprising highly skilled R&D personnel, display unique compensation patterns. Typically, tech companies allocate elevated salaries and equity stakes to key technical staff, elevating the baseline income and compressing wage inequality within firms. When evaluating the interplay between ESG ratings and industry type, data demonstrates a significant negative effect on pay disparity in high-tech firms. In stark contrast, traditional industries witness a concurrent widening of pay gaps alongside improved ESG scores. This dichotomy likely stems from differing employee capabilities and labor market fluidity; high-tech employees’ employability mitigates sharp income divides, whereas traditional sectors lack equivalent balancing forces.
Industry competition serves as another potent influence in shaping intra-firm pay structures. Given that labor compensation reflects the market’s assessment of human capital value, more competitive industries intensify bargaining dynamics. In China’s context, demographic and economic factors amplify this effect: a large, mobile labor pool increases supply and competition for ordinary employees, while a relatively nascent executive labor market limits supply elasticity. Consequently, in highly competitive sectors as measured by the Herfindahl-Hirschman Index (HHI), firms strategically escalate executive pay to attract and retain exceptional talent. This environment magnifies executives’ remuneration negotiation power, further extending salary gaps. Analysis of ESG and industry competition interaction terms evidences a statistically significant and positive effect, affirming that heightened competition exacerbates the influence of ESG on pay disparities.
Understanding these interrelations demands a nuanced grasp of corporate governance in transitional economies. The regulatory frameworks shaping SOEs, varying labor market structures, and evolving corporate responsibilities reflect a broader tension between sustainability initiatives and economic incentives. ESG ratings, initially designed to foster ethical practices, environmental stewardship, and social accountability, intersect complexly with entrenched remuneration systems, sometimes producing counterintuitive outcomes such as increased wage inequality in specific contexts.
Moreover, the role of principal-agent conflicts in wage settings cannot be overstated. As firms grow, monitoring becomes more difficult, and executives often gain disproportionate influence over compensation committees. ESG metrics may thus inadvertently empower these agents, particularly in less regulated environments, by providing additional legitimacy or leverage for wage increments linked to perceived performance improvements or sustainability achievements.
The technological dimension underscores the heterogeneity within the Chinese industrial landscape. High-tech enterprises, leveraging skilled human capital pool, inherently possess mechanisms to moderate income inequality. Elevated baseline salaries for technical staff compress the pay spectrum, thereby limiting the extent to which ESG-related policies translate into widened executive pay gaps. In contrast, traditional industries, with broader employee educational backgrounds and less fluid labor markets, reveal a susceptibility to intensified pay inequality concurrent with enhanced ESG scores.
From a macro perspective, these findings provoke critical questions around policy efficacy and corporate governance reforms. The apparent success of SOEs’ salary caps and pay scale regulations in mitigating wage disparities suggests that targeted interventions retain significant power in balancing equity and executive incentives. For non-SOE firms, however, the widening pay gaps concurrent with ESG improvements evoke concerns regarding inclusivity and labor market fairness, potentially undermining the broader social objectives embedded within ESG frameworks.
Furthermore, industry competition, as a market-driven force, interacts intricately with corporate governance and labor economics to mold compensation landscapes. While firms seek to leverage ESG capabilities to enhance reputation and performance, this strategy may simultaneously intensify pay stratification, particularly within highly contested sectors. This phenomenon accentuates the complex balance between attracting top executive talent, rewarding performance, and maintaining equitable wage distributions.
Academic discourse must therefore broaden to encompass these multifaceted influences on pay structures in the context of ESG integration. The Chinese corporate scenario offers a fertile ground for such analysis, combining transitional economic elements, state-market dualities, and evolving institutional norms. As ESG ratings gain prominence globally, delineating their heterogeneous effects on income inequality and governance remains paramount for policymakers and scholars alike.
This comprehensive examination highlights a pivotal dynamic at the intersection of sustainable business practices and executive remuneration in China. The nuanced heterogeneity, encompassing ownership structures, firm scale, technological orientation, and market competition, reveals that ESG’s role in shaping income disparities is far from uniform. Instead, it reflects a complex interplay of regulation, labor market conditions, and strategic corporate behaviors, challenging simplistic assumptions about sustainability and fairness.
In summation, the trajectory of ESG ratings’ influence on within-firm pay gaps in China underscores critical tensions between regulatory oversight, market incentives, and social equity. While salary restrictions effectively constrain wage disparities among SOEs, non-state enterprises face pronounced challenges as ESG commitments coincide with expanding pay gaps. Firm size and competitive pressures further amplify these disparities, whereas technological attributes offer mitigating effects. These insights enrich understanding of how evolving governance mechanisms interact with broader socio-economic forces in shaping compensation equity amidst rising sustainability expectations.
The implications extend beyond China’s borders, offering valuable lessons for emerging economies navigating ESG integration within complex institutional and market landscapes. As corporate responsibility paradigms sharpen, balancing executive incentives and income equality will remain central to fostering truly sustainable and socially inclusive business models worldwide.
Subject of Research: The impact of Environmental, Social, and Governance (ESG) ratings on executive compensation and within-firm pay gaps in Chinese enterprises, considering property rights, firm size, industry type, and competition.
Article Title: ESG ratings, executive pay-for-performance sensitivity and within-firm pay gap.
Article References:
Li, X., Wang, X., Zhao, Z. et al. ESG ratings, executive pay-for-performance sensitivity and within-firm pay gap. Humanit Soc Sci Commun 12, 599 (2025). https://doi.org/10.1057/s41599-025-04908-7
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