CEO–Employees pay ratio, employees’ productivity and firm performance: evidence from UK

Purpose This study aims to investigate whether pay inequality between CEO and employees in the UK impacts on employees’ productivity, which in turn affects firm outcomes. The study aims to expand the literature of CEO–employees pay ratio, employee productivity and firm performance. Design/methodology/approach The paper opted for a quantitative approach for a sample that were part of FTSE All-Share Index. Various statistical methods have been applied to test the hypotheses including pooled OLS estimation, lagged variable analysis and tests for endogeneity concerns. Findings The findings indicate a significant positive correlation between the pay ratio of CEO to employees and both employee productivity and firm performance. However, when the sample was divided into high and low CEO pay gap companies, the positive effect was less noticeable in the high pay ratio group than in the low pay ratio group. Further, the positive effect of the pay differential was significantly higher in smaller companies than larger companies. Research limitations/implications The actual behaviour and opinions of employees would be useful to know, which this study does not capture and could be done in future studies using survey. Practical implications The results for the paper inform regulators and practitioners useful information regarding the disclosure of CEO pay gap and its implications on firm performance and employees’ productivity. Originality/value The paper entails a contextual contribution via providing empirical evidence using UK data on the impact of the variance in pay between employees and CEOs on productivity and performance.