Abstract

The study aimed to investigate (1) the influence of internal compensation gap on firm performance (FP) and (2) the mediation effect of executive compensation level on the relationship between internal compensation gap and FP of listed energy companies in China. The sample was sourced from all upstream companies in energy industry on the Shanghai and Shenzhen stock markets. The data were collected from the companies’ annual reports from 2015 to 2020. Descriptive analysis, correlation matrix, and unbalanced panel data analysis were used to analyze the data. The results show that internal compensation gap has a positive influence on FP and compensation level has a mediating effect on such influence. This study provides insight into the determination of compensation for companies to incentivize executives to demonstrate their abilities for the organization’s advantage. Additionally, the findings demonstrate that tournament theory and agency theory can explain how compensation gap and level affect FP.