Identity economics meets identity leadership: Exploring the consequences of elevated CEO pay

Abstract

Economists have recently proposed a theory of identity economics in which behavior is understood to be shaped by motivations associated with identities that people share with others. At the same time psychologists have proposed a theory of identity leadership in which leaders' influence flows from their creation and promotion of shared identity with followers. Exploring links between these approaches, we examine the impact of very high leader pay on followers' identification with leaders and perceptions of their leadership. Whereas traditional approaches suggest that high pay incentivizes leadership, identity-based approaches argue that it can undermine shared identity between leaders and followers and therefore be counterproductive. Supporting this identity approach, two studies provide experimental and field evidence that people identify less strongly with a CEO who receives high pay relative to other CEOs and that this reduces that leader's perceived identity leadership and charisma. The implications for leadership, economics, and organizations are discussed.