Bottom LineCon­trary to pop­ular belief, a higher dif­fer­en­tial between CEOs’ com­pen­sa­tion and that of reg­ular employees does not lead to lower worker pro­duc­tivity or more slacking off on the job. In some cases, employees are actu­ally moti­vated to work harder by the gap in pay—and to close it by moving swiftly up the cor­po­rate ladder.

Everyone knows CEOs are wildly over­paid and their employees resent them for it, right? The media loves to stoke the public’s out­rage by focusing on the gap between the com­pen­sa­tion of CEOs and rank-​​and-​​file employees, espe­cially during eco­nomic down­turns. And the gap keeps widening. A 2005report found that the average CEO in the United States earned 431 times what a non-​​management worker made in 2004, an increase from 301 times in 2003 and 42 times in 1982.

But a new study sug­gests that if the employees of these CEOs are bitter about this imbal­ance, it doesn’t show in their work. The authors found no evi­dence that a higher pay dif­fer­en­tial leads to reduced employee pro­duc­tivity or lower firm per­for­mance. Instead, some employees appear to view the higher exec­u­tive com­pen­sa­tion as an incen­tive to work harder—especially at smaller com­pa­nies where pro­mo­tions are based on merit rather than seniority.

The authors based their find­ings on an analysis of exec­u­tive com­pen­sa­tion data for firms in the S&P 1500 indexes from 1993 through 2006. The average worker in the sample brought home US$59,870 a year, while the average CEO earned $4.6 million.

Read the article at strategy+business →