The Driver of Workplace Alienation or the Cost of Effective Stewardship? The Consequences of Wage Gap for Corporate Performance

Abstract

Relying on cross-country panel data, the paper investigates the possible repercussions of salary gap for employee productivity and corporate financial performance. Our empirical findings corroborate the presence of a negative tail effect of wage gap on productivity and employee morale. While worsening employee turnover and productivity, and increasing the chances of workplace controversies, high salary gap is found to be associated with a more efficient cost structure and higher profitability. Our evidence suggests that extreme salary gap may be curbed by targeted internal policies favoring internal promotion and career development, unionization, employee and managerial training. The composition of the board’s remuneration committee appears to play but a minor role in shaping the scale of salary gap. The results of the study are in line with equity aversion theory and suggest that extreme wage inequality may impede firms’ growth with spillover effects observable at the macro-level. Targeted policies may be necessary to counter the negative repercussions of high compensation disparities as within-firm mechanisms appear insufficient to mitigate them.