This study examines the relationship between the chief executive officer (CEO) and top management team (TMT) pay gap and consequent firm... Show moreThis study examines the relationship between the chief executive officer (CEO) and top management team (TMT) pay gap and consequent firm performance. Drawing on tournament theory and equity theory, I argue that the effect of the CEO-TMT pay gap on consequent firm performance is non-monotonic. Using data from 1995 to 2022 from S&P 1500 US firms, I explicate an inverted U-shaped relationship, such that an increase in the pay gap leads to an increase in firm performance up to a certain point, after which it declines. Additionally, multilevel analyses reveal that this curvilinear relationship is moderated by attributes of the TMT, and the industry in which the firm competes. My findings show that firms with higher TMT gender diversity suffer lower performance loss due to wider pay gaps. Furthermore, when firm executives are paid more compared to the industry norms, or when the firm has a long-tenured CEO, firm performance becomes less sensitive to larger CEO-TMT pay gaps. Lastly, when the firm competes in a masculine industry, firm performance is more negatively affected by larger CEO-TMT pay gaps. Contrary to my expectations, firm gender-diversity friendly policies failed to influence the CEO-TMT pay gap-firm performance relationship. Show less
