Determinants and Productivity Effects of CEO–Employee Pay Ratio*
We study the determinants and productivity effects of compensation ratios between top executives and lower-level employees. We establish three major results. First, CEO-employee pay ratio depends on the balance of power between the CEO (relative to the board of directors) and ordinary employees (relative to management). Pay ratio increases with CEO power and firm size but declines with labor force unionization and skill level. Second, employee productivity is unrelated with pay ratio and positively related to employee pay. Third, pay ratio is negatively related to productivity in the subsample of firms where employees invest in firm-specific skills, are members in more unionized industries, and with fewer employees. Our findings indicate that employees do not lower effort based on pay differentials between themselves and their senior management team.
Professor Venkateswaran refereed for Journal of Financial Research and Journal of Financial Education, Just before starting his doctoral studies, Venkateswaran worked as an investment banker for five years.