Executive pay dispersion: Reconciling the differing effects of pay inequality and pay inequity on firm performance

Debate persists regarding the effects of executive pay dispersion on firm performance given that conflicting findings have plagued the literature. We aim to reconcile previous inconsistencies by taking a more nuanced approach and exploring the effects of explained and unexplained executive pay dispersion on the firm's short- and long-term performance. Using a longitudinal sample of public firms over a 12-year period, we find that unexplained pay dispersion among executives-indicating pay inequity-negatively affects short-term firm performance while explained pay dispersion-indicating pay inequality-positively affects long-term firm performance. The findings help resolve prior inconsistencies associated with understanding the relationship between executive pay dispersion and firm performance. Accordingly, we advance research by demonstrating the importance of measuring pay dispersion types and accounting for the temporal nature of firm performance.