CEO–Employee Pay Gap, Productivity and Value Creation

Wojciech Przychodzen and Fernando Gómez-Bezares
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Wojciech Przychodzen: Department of Finance, University of Deusto, Avenida de las Universidades 24, Bilbao, 48007 Bizkaia, Spain
Fernando Gómez-Bezares: Department of Finance, University of Deusto, Avenida de las Universidades 24, Bilbao, 48007 Bizkaia, Spain

JRFM, 2021, vol. 14, issue 5, 1-17

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.

Keywords: productivity; pay gap; corporate governance; executive compensation; fairness; value creation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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