Preventing or encouraging illegal activities by construction firms: effects of top management team compensation and aspiration-performance discrepancies

Corporate illegal activities may result in fatal injuries and economic losses and have been widely reported in the construction industry. This study is to investigate the relationship between top management team (TMT) compensation and corporate illegal activities with the moderating effects of aspiration–performance discrepancies.

Using a multi-year sample of Chinese construction firms from 2011 to 2017, this paper employed a hierarchical logit regression model with fixed effects.

This study indicates that TMT compensation is positively related to the likelihood of corporate illegal activities. It also finds performance higher than aspirations would lower the probability of illegal activities while performance lower than aspirations also decreases the occurrence of illegal behaviors. Finally, the positive relationship between TMT compensation and illegal activities is strengthened by aspiration–performance discrepancies.

It recommended the design of executive compensation may need to be reconsidered. Next, companies need to carefully monitor top management team, especially when performance is lower than the desired level. Finally, debt-to-equity ratio deserves more attention for Chinese construction firms in suppressing illegal activities.

Given the mixed effects of TMT compensation, this study confirms its positive impact on corporate illegal behaviors. Consistent with the behavioral theory of the firm, it unveils the direct and moderating effects of aspiration-performance discrepancies. The findings are beneficial for evaluating firms' performance and considering the prevention of corporate fraudulent activities.