CEO–Employee Pay Gap, Productivity and Value Creation

Wojciech Przychodzen,Fernando Gómez-Bezares

doi:10.3390/jrfm14050196

Wojciech Przychodzen, Fernando Gómez-Bezares

Open Access

https://doi.org/10.3390/jrfm14050196

Copy DOI

Abstract

This study examines the effect of the CEO–employee pay gap on productivity and performance. Using extensive data of 751 constituents of the Standard and Poor’s (S&P) 1500 index between the years 1992–2016, we found a cubic relationship between salary differential and corporate productivity, with a rising gap adversely affecting productivity principally when it is both too low, as well as too high; intermediate pay inequality levels are less influential. A contrast in the productivity effects of the CEO–worker pay gap for firms with high average salaries and more employees was noticeable, whereas positive productivity gains were present even with a high salary gap. Thus, big companies with a highly skilled workforce are able to achieve tangible benefits through higher salary differentiation. On the other hand, companies with lower average salaries and lower capital intensity were characterized by the negative effects of wage dispersion on productivity. As a result, increasing inequality aversion is an important issue affecting performance among smaller, lower skilled labor dependent firms. Additionally, female CEOs had a significant and positive lagged effect on productivity. Finally, firm market valuation was positively stimulated by the increasing pay gap.

Highlights

Our analysis shows that there is a cubic relationship between CEO–worker salary differential and firm productivity
Existing research usually draws separately on one or the other and largely ignores the possible interaction between them. By combining both above approaches and using data for 751 constituents of the Standard and Poor (S&P) 1500 index over the years 1992–2016, we confirmed a cubic relationship between CEO–worker pay gap and corporate productivity
Competition for pay and promotion might not be strong enough to dominate over increasing inequality aversion with moderate negative productivity effect

Summary

Introduction

This study examines the effect of the CEO–employee pay gap on productivity and performance. Companies with lower average salaries and lower capital intensity were characterized by the negative effects of wage dispersion on productivity. Too high of a pay gap between the CEO and average worker may create strong negative emotions among employees, which in turn leads to job dissatisfaction, disengagement and lower productivity (Pfeffer 2007). The compensation differential between executives and employees has attracted considerable attention, our knowledge of its possible causes and consequences from a corporate economic performance perspective is still rather limited and elusive (Connelly et al 2016).

Objectives

Results

Conclusion