New research at the Business School shows that too large of a pay gap between executives and employees of a company negatively affects employee morale and harms the firm’s performance.
However, the study also found that higher executive pay relative to employee pay could encourage executives to work hard to improve corporate performance as well.
Professor Laurence Ferry and Dr Guanming He, both in the Department of Accounting, together with Dr Chang Yang, a visiting academic, investigated how executive pay and its gap with employee pay specifically influence corporate performance in the tourism industry.
To investigate this link, the researchers manually collected data on the executives’ and employees’ remunerations for tourism listed companies in Thailand and analysed its impact on corporate performance.
Both short-term compensation - salaries and bonuses - and long-term compensation - pension and other deferred compensation which includes social security, provident funds, and retirement benefits - were reviewed.
For these tourism companies, the researchers found that the gap between executive and employee wages can have a huge impact, both positively and negatively, on a firm's performance.
The impact is described as a reverse U shape, showcasing that the gap can ensure executives work tirelessly to boost performance, but also that employees can hinder performance through their low morale and increasing conflicts.
Dr Guanming He said: “Compensation is an essential issue for corporate governance 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 hand, it can negatively affect the employees’ morale, dedication, and creativity and thereby lower the productivity and performance of a firm.”
Managing wages, morale and motivation can be difficult for companies, and firms must constantly monitor, ensuring they’re making the right decisions to successfully boost firm performance, say the researchers.
Professor Laurence Ferry, who is also Head of Accounting at the Business School, said: “Fair compensation is a key dimension in measuring organisational culture, which is one of the most significant attributes for tourism companies’ success.”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.”
This study shows to boards of directors and compensation committees of tourism firms the importance of avoiding too large a pay gap between executives and employees, and ensuring all employees are considered when executive pay rises.
The professors advise that while the pay for executives to incentivise them to serve their company better is crucial, it is also crucial to lift the pay for all employees as well.