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The Impact of Relative CEO Pay on Employee Productivity

Author

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  • Afzali, Aaron

    (Hanken School of Economics)

  • Oxelheim, Lars

    (School of Business and Law, University of Agder, Norway)

  • Randøy, Trond

    (School of Business and Law, University of Agder, Norway)

  • Paulo Vieito, João

    (Polytechnic Institute of Viana do Castelo, School of Business Studies, Portugal)

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.

Suggested Citation

  • Afzali, Aaron & Oxelheim, Lars & Randøy, Trond & Paulo Vieito, João, 2023. "The Impact of Relative CEO Pay on Employee Productivity," Working Paper Series 1458, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1458
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    References listed on IDEAS

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    More about this item

    Keywords

    CEO pay; CEO pay-employee ratio; Employee productivity; Tournament incentives;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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