Abstract: Some exploratory research has been made on the relation between internal pay gap and company performance, yet there is no deep analysis on whether the relation varies with market circumstance. Based on institution background in China, this paper focuses on the relation between internal pay gap and company performance in the condition of different product market competition. The result shows that the relation forms an inverted U shape, and the turning point of the U shape moves to the right when the competition in product market gets more intense, which means that the best level of company’s internal pay gap will be higher when the competition in product market is more intense. This tells us that relevant government departments shall consider industry difference when controlling the internal pay gap to promote income equality. It is suitable to take advantage of bigger internal pay gap in the industries or companies of more intense competition so as to make internal pay gap fully play an incentive role.