The Impact of Relative CEO Pay on Employee Productivity

Aaron Afzali, Lars Oxelheim (), Trond Randøy and João Paulo Vieito
Additional contact information
Aaron Afzali: Hanken School of Economics, Postal: Finland
Lars Oxelheim: School of Business and Law, University of Agder, Norway, Postal: Lund University School of Economics and Management, Sweden, and Research Institute of Industrial Economics, Sweden,, https://www.ifn.se/en/researchers/affiliated-researchers/lars-oxelheim/
Trond Randøy: School of Business and Law, University of Agder, Norway, Postal: and Center for Corporate Governance, Copenhagen Business School, Denmark
João Paulo Vieito: Polytechnic Institute of Viana do Castelo, School of Business Studies, Portugal, Postal: and UNIAG - Management Applied Research Unit, Portugal

No 1458, Working Paper Series from Research Institute of Industrial Economics

Abstract: In this study, we examine the relationship between within-firm pay inequality and employee productivity. We use hand-collected data on a sample of S&P 1500 companies from 2018-2022 and find a concave relationship between the relative CEO pay and employee productivity. Consistent with tournament theory, we show that the pay gap between the CEO and the Vice Presidents initially positively affects employee productivity. However, this positive effect only works up to a certain level, at which - as expressed by the CEO-employee pay ratio - employee discontent initiates a fall in firm-level productivity. We identify this tipping point as the point at which CEO pay exceeds the median worker’s pay by a factor of 40. The average CEO-employee pay ratio in our sample is 193:1, suggesting that most firms could have avoided a fall in productivity by reducing their CEO-employee pay ratio. Our results remain robust after controlling for endogeneity. From a public policy perspective, our findings pave the way for corporate self-regulation of CEO pay to avoid politically imposed hard laws.

Keywords: CEO pay; CEO pay-employee ratio; Employee productivity; Tournament incentives (search for similar items in EconPapers)
JEL-codes: G18 G32 G34 J24 J33 M12 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2023-04-05
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-eff, nep-hrm and nep-lma
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