Fat Cats and Thin Followers: Excessive CEO Pay May Reduce Ability to Lead

A social identity analysis of how pay inequality divides the workplace

“…As we have shown, such categorization, in turn, can reinforce perceptions of division and corrode a sense of unity in the workplace (e.g., reduced organizational identification). In this way, the current research not only builds on previous work (i.e., explaining why higher pay inequality is detrimental) but also lends support to social identity theorizing and highlights its applicability to the pay inequality literature (Peters et al, 2019;Steffens et al, 2020).…”

“…Although extravagant pay of top leaders are often seen as a reward for their value and performance (i.e., the value they generate to the organization), our results suggest that this reward structure may backfire by introducing division among employees. In particular, our results suggest that the more top leaders are paid relative to other employees (especially when employees perceive this pay inequality), the more likely they are to be categorized as "not one of us" or as "doing it for us" by other organizational members (Steffens et al, 2019). To the extent this occurs, this is likely to be consequential for organizational performance as there is abundant evidence to show that leaders are most able to steer the organization and guide their followers is if they are perceived as in-group members (e.g., Ellemers et al, 2004;Haslam et al, 2020).…”

“…The iconic slogan "We are the 99%" captured the social identity of the protestors who were directing their discontentment towards the top one percent, the leaders of large corporations (CEOs and top executives) whose salary had increased over 1000% whilst wages of the typical worker grew by only 10% (i.e., from 1978 to 2019; Mishel & Kandra, 2020). This rise in pay inequality between the highest and lowest-paid workers is concerning because there is evidence that inequality is associated with a range of negative workplace outcomes, including reduced organizational identification and job satisfaction, less effective leadership and collaboration, and higher turnover intentions (Bloom, 1999;Conelly et al, 2016;Peters et al, 2019;Pfeffer & Langton, 1993;Shaw et al, 2002;Steffens et al, 2020). Yet, to date, there is little understanding of why higher organizational pay inequality may have these negative effects (Shaw et al, 2014).…”

“…There is reason to expect that pay-based social categorization would come at a cost to workplace functioning by undermining a sense of unity and oneness within the organization (Akerlof & Kranton, 2010; Steffens et al, 2020). According to social identity theorizing, when pay becomes a core basis for social categorization, not only does it highlight employees’ perceived differences along pay lines (between colleagues, different departmental teams, or professional roles) but it also diminishes their perceived similarities based on shared superordinate—organizational—identity (whether with colleagues or leaders; Peters et al, 2019; Platow et al, 2008; Steffens et al, 2020). Such categorization, in turn, can reduce the tendency for employees to identify as members of the organization or perceive one another as fellow in-group members who share the same identity and goals (Haslam et al, 2000).…”

“…collaboration, and higher turnover intentions (Bloom, 1999;Connelly et al, 2016;Peters et al, 2019;Pfeffer & Langton, 1993;Shaw et al, 2002;Steffens et al, 2020). Yet, to date, there is little understanding of why higher organizational pay inequality may have these negative effects (Shaw, 2014).…”