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We integrate the seemingly contradictory theoretical predictions of behavioral and economic perspectives about the relationship between pay disparity and firm performance and show that tournament and social comparison theories are more supplementary than contradictory in nature. Our results show that high levels of firm performance will be found around either meaningfully low or meaningfully high levels of pay disparity. Additional findings indicate that this curvilinear relationship is weakened in the presence of both an heir apparent and high CEO power, and strengthened when top management team members are more eligible as CEOs. These findings suggest that factors that increase or inhibit social comparison or tournament perceptions among TMT members play a role in the strength of the curvilinear relationship between pay disparity and firm performance.
