Investigating the relationship between pay disparity and organisational performance

Background. Globally, executive remuneration or compensation (the terms are used interchangeably) has increasingly come under public scrutiny over the past few years, prompting stricter executive remuneration reporting standards for listed organisations. However, despite fair pay regulations meant to address the large disparity in income between executives and employees lower down in the organisational hierarchy, executives continue to earn many more times than the average employee – as much as 300 times more (BusinessTech, 2020). Aim of the study. The aim of the present study was to investigate the relationship between pay disparity and organisational performance. Method. An exploratory research design was utilised for the purposes of the present study. Using purposive non-probability or judgement sampling, a sample of corporate organisations (n=185) that are listed on the Johannesburg Stock Exchange (JSE) were identified. Secondary quantitative data were collected from each of the organisation's publicly available Integrated Financial Statements. To investigate the relationship between pay disparity and selected organisational accounting performance measures (incl. EBITDA, ROI, ROA, EVA and Price/EBITDA), Pearson Product Moment correlation analyses, followed by multiple regression analyses, were conducted. Results. A significant positive relationship was found between pay disparity and organisational performance, as measured by EBITDA. This relationship was investigated within the various sectors of the JSE, and it was found that the telecommunications sector had the strongest significant positive relationship between pay disparity and organisational performance. In several sectors, including healthcare, energy and technology, evidence of a significant relationship between the two variables was not found. Contribution. Scholars are divided on the effects pay disparity (i.e. the difference between executive remuneration and that of the average employee) has on organisation performance. Some authors, most often using tournament theory, argue there is a positive relationship between pay disparity and organisational performance. In support of this notion, several studies have found a significant positive relationship between pay disparity and organisational accounting performance measures. However, several studies have reported a significant negative relationship between pay disparity and organisational accounting performance measures. Authors that hold this view most often use equity theory to substantiate their arguments. The latter relationship is hypothesised to be true in the current study amongst South African organisations listed on the JSE. South Africa has some of the highest rates of inequality in the world, as well as some of the largest pay gap ratios in its organisations. Studies show that employees may foster negative attitudes towards their work when they feel they are not being remunerated fairly compared to their superiors. The findings of the present study hopefully provided new insights on the possible behavioural implications of pay disparity within organisations. Keywords Pay Disparity, Executive Compensation, Pay Gap Rati