The impact of pay gaps on firm performance – the moderating effect of top management team diversity
Zhen Wang, Ziyan TanPurpose
This study aims to examine how horizontal pay disparity within the top management team (TMT) and vertical pay disparity between executives and employees shape firm performance. Integrating tournament and social comparison theories within a response surface framework, it uncovers the effects of specific configurations of both pay dispersion types. It also investigates how TMT age diversity moderates these relationships to better understand compensation structure efficacy.
Design/methodology/approach
Secondary data from over 2,500 Chinese listed companies (2004–2020) were quantitatively analyzed. Hypotheses derived from tournament and social comparison theories were tested, focusing on the mechanisms and boundary conditions governing the impact of intrafirm pay gaps on firm performance.
Findings
Based on the inverted U-shaped relationship between TMT pay gaps and firm performance, response surface analysis showed this relationship was not independent of the vertical pay gap with employees. The inverted U-shape was most pronounced under a high executive–employee pay gap. This key finding underscores that the two pay disparities operate as an interconnected system, necessitating joint examination of their co-occurrence to fully understand their impact on organizational effectiveness.
Originality/value
This research contributes to understanding compensation strategies by clarifying the effects of pay gaps on firm performance. It extends the application of tournament and social comparison theories by revealing that, in combination, TMT and executive–employee pay gaps are critical for firm performance and for identifying critical boundary conditions (e.g. age diversity and team homogeneity) influencing pay–performance relationships. The findings provide actionable insights for designing compensation structures that balance equity and motivation, driving performance.