Organizations are social entities, and people are social creatures. What this means for leaders is that social relations are important. People compare themselves to others and derive feelings of worth and status from that comparison. Consequently, pay differences have not only substantive but symbolic meaning.
Take the most notorious example [of pay differences], CEO pay. CEOs who make several hundred times more than what the average employee in their company makes send the signal that what they do is several hundred times more important. Is that really the right signal to send? If frontline people think that what they do doesn’t matter very much for the organization’s success or in the opinion of senior management, why bother worry about how well they are doing their job? It is not by accident or coincidence that many of the most successful, consistently best-performing companies have CEOs who are not outrageously overpaid – Amazon.com, CostCo, and Southwest Airlines are a few current examples. By sending a signal that performance is a collective, not just an individual, endeavor, those companies are more likely to induce thought, creativity, and effort on the part of their people.
— Hard Facts by Jeffrey Pfeffer and Robert I. Sutton
See this related blog: Paradox: Embracing Decentralization while Hailing the CEO as Corporate Savior