Predicting employee wrongdoing: The complementary effect of CEO option pay and the pay gap

Research examining the influence of executive compensation on organizational wrongdoing has focused on pay's incentive aspects. However, existing theory in sociology and social psychology has argued that executive pay can also have a social aspect, by increasing feelings of injustice, unfairness and envy. We find evidence that employee wrongdoing may be significantly explained by the simultaneous presence of employee opportunity and motivation for wrongdoing, which relate to the incentive and social aspects of CEO pay, respectively. Using a sample of U.S. banks from 2007 to 2013, we examine the relationship of CEO option pay and the pay gap (i.e., the ratio of CEO total pay to average employee pay) with the likelihood of employee wrongdoing. We find evidence that the pay gap moderates the positive relationship between CEO option pay and the likelihood of employee wrongdoing, suggesting complementarities between the incentive and social aspects of CEO pay.