CEO-employee pay gap and firm R&D efficiency

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