Impact of Pay Gap on Innovation Performance: The Moderating Role of Top Management Team Diversity

Abstract

The pursuit of innovation and the motivation of personnel have long been crucial considerations for sustainable development of organizations. However, an insufficiently addressed issue lies in the optimization of managerial and employee motivation through compensation structures. Drawing on tournament theory and social comparison theory, this research investigates the influence of both the top management team (TMT) pay gap and the TMT-employee pay gap on firms’ innovation performance. Leveraging an empirical analysis of a longitudinal dataset comprising 2517 firms with 12,052 observations spanning from 2004 to 2020, this study reveals an inverted U-shaped relationship between the TMT team pay gap and firm innovation performance. Additionally, this effect is found to be significantly mitigated in firms characterized by highly homogeneous management teams. Furthermore, our investigation indicates that a wider pay gap between executives and employees positively correlates with improved firm innovation performance. The findings from this study contribute novel theoretical explanations and empirical evidence, offering valuable insights into the nuanced ways in which pay gaps impact innovation performance within distinct organizational contexts. A better system of incentives within organizations directly promotes the development of technological innovation, contributing to social progress, human harmony, and sustainable development.