Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation
Organization Science
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This study examines the interactive effect of technological intensiveness and top management group (TMG) pay disparity on firm performance. Drawing on two literatures--task interdependence and group rewards--we argue that: (a) technological intensiveness imposes a considerable requirement for multiway information processing and collaboration among senior executives of a firm, and (b) collaboration is diminished when large pay disparities exist. Hence, TMG pay disparity should be more detrimental to subsequent performance of high-technology firms than low-technology firms. We construct seven different measures of executive pay disparity based on three major types of pay disparity (vertical, horizontal, and overall) and use a proprietary data set to test our hypotheses. The results provide consistent support for our hypotheses, thereby suggesting important implications for scholars and designers of executive compensation.