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When do pay spreads influence firm value?

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  • Zenu Sharma
  • Weihua Huang

Abstract

This article examines whether the effect of hierarchical pay structures on firm value is different between the firms in which the CEO is not the highest paid member of the top management team and those in which the CEO receives the highest pay. 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. In firms where the CEO does not receive the highest pay, pay gaps have a negative impact on firm value. The article 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.

Suggested Citation

  • Zenu Sharma & Weihua Huang, 2014. "When do pay spreads influence firm value?," Applied Financial Economics, Taylor & Francis Journals, vol. 24(11), pages 723-737, June.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:11:p:723-737
    DOI: 10.1080/09603107.2013.851769
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    References listed on IDEAS

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    1. Roger Best, 2008. "Employee Satisfaction, Firm Value and Firm Productivity," Working Papers 0806, University of Central Missouri, Department of Economics & Finance, revised May 2008.
    2. Bingley, P. & Eriksson, T, 2001. "Pay Spread and Skewness. Employee Effort and Firm Productivity," Papers 01-2, Aarhus School of Business - Department of Economics.
    3. repec:dau:papers:123456789/6159 is not listed on IDEAS
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