This study aims to explore the impact of pay disparity on firm performance. The empirical results based on non-financial firms listed in the Taiwan Stock Exchange from 2013 to 2022 show that the economic-based pay ratio is positively associated with stock market returns as well as accounting performance, indicating that the pay gap in line with substantial contribution not only does not reduce employee morale but also promotes company performance. However, the non-economic based pay ratio is negatively related to stock market returns and accounting performance, which indicate that increasing the abnormal pay gap between the upper and lower levels is harmful to employee morale and reduce firm performance. In addition, this study further find that technology employees and non-technology employees have different behavioral responses to pay differentials. Employees in the technology industry are less happy to see the widening gap between the upper and lower levels of economic-based pay, but show lower rejection of senior managers receiving higher abnormal (non-performance) pay.
