Firms continue to increase wage inequality. The pandemic put a spotlight on the growth of wage inequality between top managers and employees. As the New York Times recently wrote: “While millions of people struggled to make ends meet, many of the companies hit hardest in 2020 showered their executives with riches.” Do firms have an incentive to raise wage inequality?
This Journal of Marketing study finds that a firm can improve its short-term profitability by increasing wage inequality. However, the firm jeopardizes its customer relationships in the process and profitability suffers in the long-term. Specifically, across two large-scale studies, the authors find that unequal wages may motivate higher short-term performance from employees—they increase their effort to achieve those higher wages. However, employees may also cut corners, collaborate less with coworkers, and pay less attention to customers’ changing needs. These actions improve profits in the short-term but ultimately weaken customer satisfaction, which detracts from long-term profits. Do firms have an incentive to raise wage inequality? In terms of bottom-line impact, the answer is: “yes” in the short run and “no” in the long run. However, when looking at the customer impact, the answer is “no” because of the negative impact of wage inequality on customer satisfaction, which weakens firm profits.
Featured Speakers: Christian Homburg and Boas Bamberger (both of University of Mannheim)
Full Journal of Marketing article: https://doi.org/10.1177/00222429211026655
Read the Scholarly Insight for this study here.