When do Pay Spreads Influence Firm Performance?

36 Pages Posted: 17 Mar 2010 Last revised: 7 Jun 2012

See all articles by Weihua Huang

Weihua Huang

Finance Department, Maastricht University

Zenu Sharma

Rensselaer Polytechnic Institute

Date Written: June 16, 2010

Abstract

This paper examines the effect of hierarchical pay structures on firm value in firms where CEOs are not the highest paid members of the top management teams. We find that the difference in pay between CEO and VPs benefits firm value only when CEO is the highest paid member of the top management team. When the CEO does not receive the highest pay, pay spreads and CEO centrality both have a negative impact on firm performance. The paper also finds that financial distress, family ownership, firm size and R&D intensity increase the likelihood of CEO not being the highest paid manager, whereas CEO entrenchment and CEO power along with dividend payout decrease this likelihood.

Keywords: Pay Spread Firm Performance

JEL Classification: G3, G30, J33, L23

Suggested Citation

Huang, Weihua and Sharma, Zenu, When do Pay Spreads Influence Firm Performance? (June 16, 2010). Available at SSRN: https://ssrn.com/abstract=1572719 or http://dx.doi.org/10.2139/ssrn.1572719

Weihua Huang

Finance Department, Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Zenu Sharma (Contact Author)

Rensselaer Polytechnic Institute ( email )

Troy, NY 12180
United States

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