Pay Gap, Employee Motivation, and Corporate Financial Performance: An Inverted-U Mediation Framework

DOI: https://doi.org/10.62517/jel.202614510

Author(s)

Jinfu Guo

Affiliation(s)

School of Economics and Management College, ‌University of ‌Civil Aviation University of China, TianJin, China *Corresponding Author.

Abstract

How large should the income gap between executives and ordinary employees be within the same firm? This question has drawn growing attention from investors and regulators in recent years and genuinely troubles many compensation committees. The question this paper aims to answer is simple: what is the relationship between this gap and corporate financial performance, and what role does employee motivation play in it? The study places tournament theory, equity theory, and expectancy theory within a single framework and tests it using public data from listed companies. The overall finding is that when the gap is too small, incentives are insufficient; once the gap grows beyond a certain point, perceptions of fairness are damaged, turnover rises, collaboration deteriorates, and performance declines instead. In other words, the relationship is broadly an inverted U, with employee motivation serving as the intervening transmission channel. For compensation design, this implies neither excessive compression nor unlimited widening of the gap, but rather a balance between efficiency and fairness.

Keywords

Pay Gap; Employee Motivation; Corporate Financial Performance; Tournament Incentives; Organizational Justice

References

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