Pay disparities within top management groups: evidence of harmful effects on performance of high-technology firms.

This study examines the interactive effect of technological intensiveness and top management group (TMG) pay disparity on firm performance. Drawing on two literatures--task interdependence and group rewards--we argue that: (a) technological intensiveness imposes a considerable requirement for multiway information processing and collaboration among senior executives of a firm, and (b) collaboration is diminished when large pay disparities exist. Hence, TMG pay disparity should be more detrimental to subsequent performance of high-technology firms than low-technology firms. We construct seven different measures of executive pay disparity based on three major types of pay disparity (vertical, horizontal, and overall) and use a proprietary data set to test our hypotheses. The results provide consistent support for our hypotheses, thereby suggesting important implications for scholars and designers of executive compensation.

Key words: executive compensation; pay disparity; top management groups; high-tech firms

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The literature on executive compensation has focused almost exclusively on the determinants or consequences of pay for individual executives, especially CEOs. However, executive work is invariably shared, and relational pay patterns among executives can be expected to affect the functioning of the senior group (e.g., Baron and Pfeffer 1994, Siegel and Hambrick 1996).

The high-technology firm--one that is in a technologically intensive industry, as gauged by research and development (R & D)/sales--presents a particularly interesting paradox for scholars and designers of executive compensation. On the one hand, the dynamism in such an industry would seem to call for entrepreneurially minded executives who are encouraged to show as much individual initiative as possible and who accordingly should be rewarded primarily on the basis of their own (or their subunits') performance. On the other hand, a high-technology setting imposes considerable need for intensive collaboration and coordination among executives, as part of their efforts to manage the design, production, and selling of an ever-shifting set of offerings. If so, then financial rewards in the high-technology firm should foster a firmwide view and collaboration, as opposed to individual or subunit achievement.

Drawing on the extensive literatures of task interdependence and group rewards, along with a more embryonic literature on top management groups (TMGs), we believe that the latter philosophy should prevail: Firms in high-technology industries--more so than in relatively stable, low-technology settings--should benefit from having executive rewards that are homogenous and equality oriented. Or, in other words, high-tech companies should suffer (more than low-tech companies) if their top executives are paid widely disparate amounts.

The purpose of our paper is twofold: (1) to further develop and test this idea and (2) to introduce new concepts and measures of pay disparity within TMGs. Because there is so little research on TMG pay, and because our data--which are drawn from a consulting firm's proprietary database--are somewhat limited, we view this project as exploratory.