Does national culture impact pay-for-performance sensitivity and gender pay gap in executive compensation?

Purpose This study aims to investigate how cultural differences across countries affect CEO and executive compensation practices in terms of total compensation, equity-based compensation and pay-for-performance sensitivity. Design/methodology/approach This study estimates the model using a Generalised Least Squares random-effects estimator, which accounts for unobserved firm heterogeneity. Standard errors are clustered at the firm level to correct for within-firm correlation and heteroskedasticity. Findings This study finds that executive compensation is influenced by cultural values of the society in which the company operates. In assertive societies, CEO demands high compensation and the structure of that compensation is closely tied to the firm performance. Furthermore, in such societies, there is a lower compensation disparity among the top management team. Secondly, in collective societies, executive compensation is lower, but the compensation disparity is higher in the boardroom. Thirdly, the results show that in countries with higher power distance, there is more disparity in compensation among top management team. Fourthly, this study finds that managers in countries with high uncertainty avoidance generally receive less equity-based compensation. Finally, this study documents that in societies with lower gender equality, there tends to be a larger proportion of discriminatory compensation gap between males and females. Originality/value This study helps practitioners better understand how national culture affects compensation contract design. Policymakers should consider the local cultural environment while designing new corporate governance regulations and corporate laws.