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CEO-employee pay gap and firm R&D efficiency

Author

Listed:
  • H. Leon Chan
  • Brett Kawada
  • Taekjin Shin
  • Jeff Wang

Abstract

Purpose - This study aims to examine whether the pay gap between the chief executive officer (CEO) and non-executive employees affects the firm’s research and development (R&D) efficiency. Design/methodology/approach - The dependent variable is the firm’s R&D efficiency, defined as a percentage increase in revenue from a 1-per cent increase in R&D spending. The main independent variable is the CEO-employee pay gap, defined as the ratio of annual total compensation for the CEO to the average of non-executive employees of the firm. The authors estimate fixed-effects models to examine the association between R&D efficiency and the pay gap between CEO and non-executive employees. Findings - Results indicate a negative and significant association between R&D efficiency and CEO-employee pay gap, which suggests that a wider pay gap reduces employee motivation and effort, consistent with pay equity theory. We also find that the CEO-employee pay gap negatively moderates the relationship between employee pay growth and R&D efficiency Research limitations/implications - Recently enacted pay gap disclosure requirements mandated by the Dodd-Frank Act will make the disparity between CEO and non-executive compensation more salient. This study provides evidence of a firm outcome associated with that disparity. Originality/value - This study is among the first to investigate the impact of the pay gap on R&D efficiency, a firm outcome not previously explored in the literature. This study also investigates CEO-employee pay gap’s role as a factor that moderates the effects of employee pay growth and institutional ownership on R&D efficiency

Suggested Citation

  • H. Leon Chan & Brett Kawada & Taekjin Shin & Jeff Wang, 2020. "CEO-employee pay gap and firm R&D efficiency," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 19(2), pages 271-287, April.
    • Handle: RePEc:eme:rafpps:raf-10-2018-0207
    DOI: 10.1108/RAF-10-2018-0207
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    Cited by:

    1. Kong, Gaowen & Huang, Jiating & Ma, Guangyuan, 2023. "Anti-corruption and within-firm pay gap: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).

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