The Impact of CEO-Employee Pay Gap on Firm Innovativeness
Abstract
This study investigates the impact of the CEO-employee pay gap on firm innovativeness, defined as a company’s ability to generate economic value from its R&D activities. While prior research has focused on financial performance, the effect of vertical pay dispersion on innovation outcomes remains underexplored, particularly in developed European and Asian markets. Using a sample of public 362 companies from technology-intensive and non-technology-intensive industries over the 2012–2022 periods, we employ the Research Quotient (RQ) as output-elasticity-based measure of innovativeness. Our panel data analysis reveals three main findings. First, the CEO-employee pay gap has a significant negative net effect on firm innovativeness, supporting social comparison and pay equity theories over tournament theory. Second, this relationship is moderated by industry and regional contexts: the negative impact is less pronounced in technology-intensive industries and among firms located in developed Asian countries, where collectivist cultural norms may foster long-term orientation and tolerance for hierarchical differences. Third, we document an indirect moderating effect whereby the pay gap dampens the positive relationship between employee pay growth and firm innovativeness. Our results are robust to fixed-effects specifications and various sensitivity checks. These findings have important implications for corporate governance,
compensation design, and investment analysis, suggesting that optimal incentive structures must balance CEO incentives with rank-and-file motivation to foster sustainable innovation.
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References
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