Pay disparity and innovation: evidence from firm level data

This paper investigates the relationship between pay disparity and innovation. In an empirical examination of S&P 4, 5, and 600 firms, it was found that difference in pay between CEO and the remaining top management is positively associated with higher research and development, patents and citations to patents. It was also found that the difference in pay between CEO and the chief technical officer (CTO) as well as CEO and the rest of the organisation also has a positive relationship with the measures of innovation. Positive relationship between pay inequality and innovation suggests that managers are rewarded for skill.