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.

Long Zhang. Employee Directors and Internal Compensation Fairness: Evidence from China. Academic Journal of Business & Management (2026), Vol. 8, Issue 1: 137-146. https://doi.org/10.25236/AJBM.2026.080119.

[1] Liu G, Wang A, Wang K, et al. Shareholder bargaining power and labor income share: Evidence from a quasi-natural experiment in China[J]. Finance Research Letters, 2024, 59: 104829.

[2] Chyz J A, Eulerich M, Fligge B, et al. Codetermination and aggressive reporting: Audit committee employee representation, tax aggressiveness, and earnings management[J]. Journal of International Accounting, Auditing and Taxation, 2023, 51: 100543.

[3] Lin C, Schmid T, Xuan Y. Employee representation and financial leverage[J]. Journal of Financial Economics, 2018, 127(2): 303-324.

[4] Fauver L, Fuerst M E. Does good corporate governance include employee representation? Evidence from German corporate boards[J]. Journal of Financial Economics, 2006, 82(3): 673-710.

[5] Zhu M X. Corporate governance system innovation based on human capital property rights influence[J]. Science of Science and Management of S.& T., 2004, (10): 118-120. (In Chinese)

[6] Bagdi K. The future of employees' board-level representation in the European Union[J]. Procedia Economics and Finance, 2015, 23: 1394-1400.

[7] Belot F, Waxin T. Mandatory employee board representation: Good news for family firms?[J]. International Review of Law and Economics, 2022, 71: 106084.

[8] Siebert Horst, Cheng F R. Co-determination in German corporate governance[J]. Foreign Theoretical Trends, 2006, (6): 33-35+51. (In Chinese)

[9] Li C J. Common governance of stakeholders: Experience from German corporate governance[J]. Enterprise Management, 2005, (6): 36-37. (In Chinese)

[10] Yu Z M. Employee directors: Marginalized democracy? Investigation of employee directors in central state-owned enterprises[J]. State-Owned Enterprises, 2013, (2): 22-29. (In Chinese)

[11] Dong S. Suspending the employee director system[J]. Board of Directors, 2011, (2): 27. (In Chinese)

[12] Zhang F. Questioning employee participation in corporate control: Theoretical and institutional analysis of 'co-determination'[J]. Modern Law Science, 2004, (2): 138-143. (In Chinese)

[13] Liu D H. Institutional positioning and functional reconstruction of listed company employee directors from the ESG perspective[J]. Social Sciences in Yunnan, 2023, (6): 114-124. (In Chinese)

[14] Yang Q, Xue Y N, Yurtoğlu B B. Exploring board functions in China: Strategic advising or compensation monitoring?[J]. Journal of Financial Research, 2011, (3): 165-183. (In Chinese)

[15] Gong H F, Mao N. Advisory directors, monitoring directors, and board governance effectiveness[J]. Journal of Management Sciences in China, 2014, 17(2): 81-94. (In Chinese)

[16] Lu R, Wei M H. Progress in management power theory of compensation setting[J]. Economic Management Journal, 2008, (1): 90-93. (In Chinese)

[17] Fang J X. Executive power and asymmetry of corporate pay changes[J]. Economic Research Journal, 2011, 46(4): 107-120. (In Chinese)

[18] Cai H. Employee participation in management and the improvement of China's company law[J]. Truth Seeking, 2004, (S4): 209-210. (In Chinese)

[19] Hu G R. Deficiencies and corrections of the employee director system in state-owned companies[J]. Social Sciences, 2010, (11): 95-103. (In Chinese)

[20] Lou Q R. Employee participation in corporate governance: Institutional perspective and construction plan[J]. Hubei Social Sciences, 2024, (2): 123-132. (In Chinese)

[21] Lei Q H, Chen J X. Listed company extra-corporate governance boundary, executive excess compensation, and firm value[J]. Financial Review, 2017, 9(4): 40-61+124-125. (In Chinese)

[22] Kong D M, Xu M L, Kong G W. Intra-firm pay gap and innovation[J]. Economic Research Journal, 2017, 52(10): 144-157. (In Chinese)

[23] Zhang Z T. Empirical study on the impact of intra-firm pay gap on future organizational performance[J]. Accounting Research, 2008, (9): 81-87. (In Chinese)

[24] Cheng X S, Liu J M, Chen J H. Talent signal or compensation defense: Excess compensation and strategic information disclosure[J]. Journal of Financial Research, 2015, (12): 146-161. (In Chinese)

[25] Cai G L, Liu J H, Ma X X. Non-state shareholder governance and executive compensation incentives in SOEs[J]. Management World, 2018, 34(5): 137-149. (In Chinese)