Abstract: Increasing labor income share is a crucial pathway to promote social fairness and achieve common prosperity. Existing research has extensively explored various determinants of labor income share, but little attention has been paid to the labor income distribution behavior of companies facing operational difficulties. In response to this gap, this paper empirically examines the impact of performance aspiration gap on labor income share using annual data from Chinese A-share listed companies from 2007 to 2022. The findings reveal that the larger the performance aspiration gap, the higher the labor income share, indicating that firms whose operational performance falls short of aspiration tend to significantly increase their labor distribution levels. The mechanism tests indicate that performance aspiration gap primarily increases firms’ labor income share through employee retention and incentive mechanisms. Heterogeneity analysis shows that the impact of performance aspiration gaps on increasing labor income share is more pronounced in firms with poor absolute performance, non-labor-intensive firms, firms located in central and western regions of China, firms in areas with less abundant labor supply, and firms with lower employee skill exclusivity. Furthermore, this study discovers that performance aspiration gap alleviates the pay disparity between executives and ordinary employees, suggesting that the gap mainly elevates the income level of regular employees. Finally, the study finds that an increase in the share of labor income contributes to improving firms’ operational performance. In sum, this paper not only enriches the literature on the factors influencing performance aspiration gaps and labor income share, but also provides important practical implications for increasing the proportion of labor compensation and achieving common prosperity.

Key words: performance aspiration gap, labor income share, organizational performance feedback theory