Breathing life into equity: How air pollution influences corporate pay gap

Using a dataset encompassing 19,229 Chinese listed firm-year observations from 2014 to 2020, this study investigates the relationship between air quality and the pay gap between executives and employees. Our empirical results indicate that companies tend to reduce the pay gap in response to air pollution. These results exhibit robustness through various methodological approaches: employing thermal inversion as an instrumental variable (IV) for IV regressions, adopting quantile regressions, utilizing alternative metrics for assessing air pollution and corporate pay gap, expanding control variables, excluding firms undergoing reorganization, and applying firmlevel clustering. This effect is especially strong in corporations with greater public scrutiny, strong corporate governance, and fewer financial constraints. Moreover, such strategic adjustments in compensation policies not only help firms retain valuable human resources, but also ultimately enhance their green innovation and ESG performance, as diminished pay gap contribute to fostering increased employee engagement and motivation within the work environment. Our research contributes to environmental management by demonstrating how air quality can be a pivotal factor in corporate compensation strategies. The findings provide actionable insights for executives and policymakers, advocating for the integration of environmental considerations into core business frameworks.