Over the last sev­eral decades, the pay gap between CEOs and rank-​​and-​​file employees has increased at an unprece­dented pace. According to the AFL-​​CIO, the average U.S. CEO earned 352 times the pay of the typ­ical Amer­ican worker in 2012, up from 42 times in 1980. 

The CEO-​​to-​​worker pay imbal­ance has drawn the atten­tion of the pop­ular press, while the Secu­ri­ties and Exchange Com­mis­sion has pro­posed that public com­pa­nies dis­close the earning dis­parity between their employees and chief executives. 

But a recent study by two North­eastern Uni­ver­sity researchers sug­gests that the pay dif­fer­en­tial between CEOs and reg­ular workers does not neg­a­tively affect the bottom line, sti­fling nei­ther employee pro­duc­tivity nor firm per­for­mance. Instead, the pay gap appears to moti­vate employees to work harder, espe­cially at smaller com­pa­nies in which pro­mo­tions are performance-​​based. At firms with fewer than 3,250 employees, the study found, the moti­va­tion to move up the cor­po­rate ladder led to a pro­duc­tion increase of 10.5 percent. 

“Employees at firms where pro­mo­tion is depen­dent on merit see an oppor­tu­nity to close the pay gap by upping their effort,” explained coau­thor Olubunmi Faleye, an asso­ciate pro­fessor of finance and insur­ance and the Trahan Family Fac­ulty Fellow in the D'Amore-McKim School of Busi­ness. 

The results of the study were pub­lished in the August edi­tion of the Journal of Banking and Finance. In addi­tion to Faleye, the study's authors com­prised Anand Venkateswaran, an asso­ciate pro­fessor of finance and the Edward Philip Chase Fellow in D'Amore-McKim School of Business; and Ebru Reis, an assis­tant pro­fessor of finance in the McCallum Grad­uate School of Busi­ness at Bentley University. 

Their find­ings were based on exec­u­tive com­pen­sa­tion data for firms in Stan­dard and Poor's 1500 indexes from 1993–2006. The average CEO in the sample earned $4.6 mil­lion per year while the average worker earned $59,870. 

The authors mea­sured firm per­for­mance by cal­cu­lating rev­enue per employee as well as total-​​factor pro­duc­tivity, which assess a firm's output rel­a­tive to the size of its inputs. 

Using these met­rics, they ana­lyzed a series of spe­cial cases in which the pay gap could be expected to trans­form hard workers into slackers. In one case, the researchers looked at union­ized firms in which employees faced a low risk of man­age­rial ret­ri­bu­tion for shirking their respon­si­bil­i­ties. In another, they looked at firms in which employees were more cog­nizant of the com­pen­sa­tion of their top exec­u­tives because of their pres­ence in the main­stream press. In each instance, the researchers found no cor­re­la­tion between pay ratios and job performance. 

“But this does not mean that employees do not care about pay,” noted Faleye. “You would care if I made $50,000 and you made $30,000 for the same job.” 

In con­clu­sion, the authors stopped short of rec­om­mending a cor­po­rate com­pen­sa­tion struc­ture and dis­missed the idea of leg­is­la­tion to limit CEO-​​employee pay ratios. 

“We believe such propo­si­tions are well-​​intentioned, yet our find­ings sug­gest that they are likely to impose unin­tended costs on some classes of firms while not ben­e­fit­ing others,” they wrote. “We hope that these results will stim­u­late addi­tional research into these issues with a view to pro­viding com­pre­hen­sive evi­dence that informs sound public policy.”