Minding the Gap

Abstract

Management researchers have long been concerned with the antecedents and consequences of managerial compensation. More recently, scholarly and popular attention has turned to the gap in pay between workers at the highest and lowest levels of the organization, or “pay dispersion.” This study investigates the performance implications of pay dispersion on a longitudinal (10-year) sample of publicly traded firms from multiple industries. We combine explanations based on tournament theory and equity theory to develop a model wherein pay dispersion has opposing effects on a firm’s short-term performance and their trend in performance over time. We also show that ownership is a key antecedent of pay dispersion. Specifically, transient institutional investors (who have short time horizons and equity stakes in a wide variety of firms) positively influence pay dispersion whereas dedicated institutional investors (who have longer investment time horizons and equity stakes in fewer firms) negatively influence pay dispersion. We discuss the wide-ranging implications of these findings for scholars, managers, and policy makers alike.