Minority State Ownership and Compensation Outcomes in Privately Owned Enterprises: Evidence From China

ABSTRACT Persistent compensation disparities between privately owned enterprises (POEs) and state‐owned enterprises (SOEs), together with substantial pay gaps within POEs, are salient manifestations of income inequality in China. This study examines how minority state ownership reshapes the compensation structure of POEs. Using a sample of Chinese A‐share listed POEs from 2010 to 2020, we find that minority state ownership increases overall employee compensation and reduces the internal pay gap, operating through two channels: the relaxation of financial constraints and the strengthening of governance over the pay‐setting process. These compensation‐improving effects are conditional on the strength of state investors' redistributive motives and governance capacity. They are more pronounced in regions with lower marketization, greater local government debt pressure, and higher minimum wage standards. On the investor side, board representation strengthens both effects, a central government origin matters mainly for raising employee pay, and an industrial rather than financial orientation matters mainly for compressing the pay gap. Beyond cash compensation, minority state ownership also enhances non‐wage benefits, including labour union coverage and social welfare provisions. These compensation improvements translate into higher productive efficiency and greater innovation output; however, excessive compression of the executive‐employee pay gap weakens innovation. The study enriches the literature on the economic consequences of state ownership and extends the mixed‐ownership literature by shifting the focus from introducing non‐state capital into SOEs to the reciprocal configuration of introducing state capital into POEs, and by documenting labour‐side distributional consequences. Practically, the findings support leveraging minority state ownership as an instrument for addressing intra‐firm income inequality and suggest that POEs can strengthen pay‐setting oversight by engaging state investors with board representation while balancing pay equity with innovation incentives.