A short distance of power is the explanation for the small wage differences between industrial workers and top executives in Norway, as shown in a BI Norwegian Business School study of salaries in 25 countries.

Cultural differences may explain fifferences in executive pay, according to a BI Norwegian Business School study.

RESEARCH @ BI: Executive pay and cultural differences

In Brazil, the wages of 57 industrial workers have to be added up to pay for one single top executive.

In Norway, the corresponding ratio is four to one. Norwegian top executives have to make do with an annual salary of one tenth of what his or her American top executive colleague earns.

The level of top executive salaries varies considerably across international borders. So does the gap between the average industrial worker's salary and the salary of a top executive.

Why does Norway come out on top on the equal pay issue in a world perspective, while areas such as South-America distinguish themselves with the widest gap on the pay scale between an industrial worker and a top executive?

Culture explains the differences

Associate professor Tor Grenness at BI Norwegian Business School has conducted a study in 25 different countries, looking into  the correlation between different cultural dimensions and the top executive salaries and the salary gap (wage differential between an industrial worker and a top executive).

The findings of this study is published in the international scientific periodical Compensation & Benefits Review.

"The three cultural dimensions involving distance of power, masculinity and individualism, are seen to be particularly significant in explaining this", Grenness points out.

Distance of power and salary gap

The study shows that in countries with a short distance of power, for example Norway, we also find the lowest wage differences between industrial workers and top executives. In countries with a wider distance of power, such as South America, we find the largest salary gap.

According to Grenness, distance of power is a reflection of how benefits and privileges are distributed in a society, and to what extent this distribution is accepted. Countries with a large distance of power is not only characterised by an uneven distribution of benefits. These differences are also accepted.

“In countries with a smaller distance of power, extreme variations in distribution is not accepted. Accordingly, major salary gaps are not accepted here”, the BI researcher points out.

USA on top

American top executives may rejoice in the highest top executive salaries among the 25 countries examined.

In his study, Tor Grenness finds a correlation between the cultural dimension of individualism and the level of top executive salaries.

Strongly individualistic cultures, such as for example the USA, also have the greatest acceptance of individually adjusted salaries and various types of performance-based pay. This tends to results in  high executive salaries.

"The combination of individualistic and masculine values reinforce the acceptance of high top executive salaries", Grenness maintains.
Norway scores relatively high on the individualist dimension, but contrary to the USA, we score extremely low on masculine values.

This is expressed, for example, as a preference for collaboration rather than competition. This combination of individualism and a lesser degree of masculinity would, in Grenness' opinion, explain the relatively low top executive salaries.

Across the borders

The study shows that national cultures contribute to explaining wage differences across country borders.

According to Grenness, this is useful knowledge for organisations with international operations.

"Employees from different cultures have different expectations, both in terms of what the right salary should be, and the accepted wage differences.

It is important for companies to take cultural differences into consideration in developing a wage policy that promotes motivation and job satisfaction.”

Reference:

Tor Grenness: The Impact of National Culture on CEO Compensation and Salary Gaps Between CEOs and Manufacturing Workers. Compensation & Benefits Review March/April 2011 vol. 43 no. 2, doi: 10.1177/0886368710393136.

Express your opinion:

Please send your comments and viewpoints on this article to forskning@bi.no
Text: Audun Farbrot, Head of Research Communication at BI Norwegian School of Management (E-mail: forskning@bi.no)

Questions about this article? Other questions? Contact BI Business Review

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