Pay Inequality, Job Satisfaction, and Firm Performance

We find that within-firm base pay inequality is negatively associated with employee morale. Increases in hourly wages improve morale even among high-salaried employees. In contrast, total pay inequality is positively associated with morale. Low base pay (high total pay) inequality corresponds with employer reviews that emphasize fairness and commitment (talent and reward). Base pay inequality is negatively related to firm performance with no significant relation for total pay inequality. The evidence is consistent with employees viewing base pay as compensation for unobservable effort, with disparity harming morale and productivity. Incentive-based pay disparity may positively signal the value of promotions, yet it is not associated with greater overall productivity.