Large pay gaps affect company performance

Businesses should monitor wages and their impact on morale and motivation

Large pay gaps affect company performance

Significant pay gaps between employees and executives can be detrimental to firms’ performance, a study by Durham University Business School has found – but can also be beneficial.

Academics collected data from 29 tourism firms listed in Thailand and analysed their performance from 2002 to 2018, and compared it with executive remuneration at the companies – both short-term, such as salaries and bonuses, and long-term, such as pensions.

They found that the gap between employee wages and executive pay packets can have an impact on company performance, both positive and negative. The correlation between the two, the team found, forms a reverse-U shape, showing that a gap of a certain size can ensure executives work hard to boost the firm’s performance, but also that employees’ low morale can hinder performance.

Dr Guanming He, associate professor in accounting at Durham Business School and one of the report’s authors, said: “Compensation is an essential issue… as it influences the performance and growth of a firm. However, offering executives the right level of compensation is a tricky balancing act.”

“On one hand, it acts as an incentive for talented executives to further contribute to firm performance, but on the other, it can negatively affect the employees’ morale, dedication and creativity and thereby lower the productivity and performance of a firm.”

Professor Laurence Ferry, head of accounting at Durham Business School and another of the report’s authors, added: “Ensuring all employees have appropriate salaries will help a firm to build a harmonious organisational culture, which is more likely to ensure the company performs effectively.”

The researchers advised that although difficult, businesses need to constantly monitor their workforces’ wages, morale and motivation to make sure they are making the right decisions to successfully boost performance.