What promotes economic growth better: Small or large differences in salaries?

I’m born and have grown up in Denmark. That is probably one of the important reasons why I tend to be in favour of companies where the difference between what the highest paid person in a company is paid and what the lowest paid person in the same company is paid is relatively modest.

In, for example, the United States of America, I now and then read about companies where the difference between what the highest paid person in a company is paid and what the lowest paid person in the same company is paid is very large, for example a difference in excess of factor 1:50. In this regard, I stumpled upon this interesting posting of December 17th, 2008 from Mr. Paul Krugman to which - up until now - more than 350 comments have been written.

What do you think promotes economic growth better: Companies where the differences between the highest and the lowest salaries are very large, let’s say above factor 1:50, or companies where the differences between the highest and the lowest salaries are relatively modest? Please explain why.

Comments

Professor Bruno S. Frey (University of Zürich) found in one of his studies that big differences in salaries makes football teams less successful.
There was a report on this in Kassensturz on October 17 2006. The report also mentioned that in some leading Swiss companies the difference between lowest and highest salaries increased as much as 267% from 2003 to 2005.
Unknown said…
Thanks very much for the link, Patrick. Interesting report. Do you have examples of companies that have learned from the valuable research of Mr. Frey - and, consequently, have reduced the differences in salaries between the highest and lowest paid people working for the respective companies - thereby making the companies more successful?
Paul Sloane said…
Entrepreneurs should be allowed to reap large rewards for their risk taking - after all most start up companies fail. However, captains of large organisations are not really entrepreneurs. They need to be rewarded for their hard work and success but some of the compensations plans of US CEOs look gargantuan. Generally markets work these things out - eventually.
deborah said…
I would not prefer one opinion in general. I think most importan is that the wages are depending on the efforts so if an employee did not succed it should be shown in paying him a lower salary.

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