Corporate Governance and Within-firm Pay Inequality: Evidence from Japan’s basic survey on wage structure

This paper examines the relationship between corporate governance and employee compensation structures in Japanese listed firms. We match questionnaire information from the Ministry of Health, Labour and Welfare’s Basic Survey on Wage Structure for the 2015–2023 period with firm-level financial and corporate governance information. Using comparable organizational ranks—non-rank employees, supervisors, section managers, and department heads—we study how the association between firm performance and pay varies across ranks and how the outside director ratio relates to pay differentials. ROA is positively associated with employee pay, with a stronger relationship for section managers and department heads. We find no clear evidence that a higher outside director ratio strengthens pay–performance sensitivity. In contrast, a higher outside director ratio is systematically associated with larger pay differentials between non-rank employees and higher ranks. The pattern suggests that firms with higher outside director ratios have steeper internal pay gradients, consistent with promotion-based and tournament incentives.