Does ‘inter-bank’ horizontal pay disparity influence performance? Evidence from emerging economy

The paper has two main objectives: one, to investigate if inter-bank horizontal dispersion in the remuneration of executives has any significant influence on bank performance. And two, to explore various situations with respect to board quality, agency cost, and government ownership under which the dispersion-performance nexus is moderated. The paper employs a two-step system GMM of (Blundell and Bond, Journal of Econometrics 8:115–143, 1998) to account for the possible endogeneity issues, and Driscoll–Kraay’s non-parametric matrix estimator to account for cross-sectional dependence. The findings show that horizontal pay dispersion has a negative influence on bank performance. It produces evidence in favor of the “equity fairness theory” that higher pay dispersion would incentivize them to engage in excessive risk-taking for maximizing their personal interests, which emerges to be detrimental to the bank’s performance. Further evidence of moderating effect shows that in the presence of effective board oversight, pay dispersion exerts a favorable influence on the performance of Indian banking firms. The research has significant policy ramifications for regulators to apprehend the undesirable implications of pay dispersion on bank performance and initiate quick action to scrutinize the governance practices of higher-paying banks.