Is performance affected by the CEO-Employee pay gap? Evidence from Australia

It is argued that pay inequality between CEOs and employees impacts employee performance, although empirical studies are inconsistent about the directionality of the effect. This paper shows that seemingly contradictory predictions of sociological and economic perspectives about the impact of pay inequality are more complementary than contradictory. Using data from a sample of public companies over the period 2004-2019, we show that pay inequality attributed to individuals’ skills, company characteristics, and labour market is positively associated with employee performance. However, this positive impact on employee performance declines at high levels of pay disparity. In addition, pay inequality based on other unknown factors has a negative impact on employee performance.