Pay Disparities Within Top Management Groups: Evidence of Harmful Effects on Performance of High-Technology Firms

Abstract

This study examines the interactive effect of technological intensiveness and top management group (TMG) pay disparity on firm performance. Drawing on two literatures—task interdependence and group rewards—we argue that: (a) technological intensiveness imposes a considerable requirement for multiway information processing and collaboration among senior executives of a firm, and (b) collaboration is diminished when large pay disparities exist. Hence, TMG pay disparity should be more detrimental to subsequent performance of high-technology firms than low-technology firms. We construct seven different measures of executive pay disparity based on three major types of pay disparity (vertical, horizontal, and overall) and use a proprietary data set to test our hypotheses. The results provide consistent support for our hypotheses, thereby suggesting important implications for scholars and designers of executive compensation.