Merit-Based Pay Gaps Drive 1.4% Higher Returns

'+1.46% ROA

Impact of "Economic Pay Disparity" on ROA

The Research

Not all pay gaps are created equal. The same Harvard study that punished "unfair" pay gaps found a positive correlation for "justified" ones. The "Economic Pay Ratio"—disparity driven by observable economic factors like skill, complexity, and performance—was positively associated with firm value. A one standard deviation increase in this merit-based disparity led to a **1.46% increase in RNOA**. This supports "Tournament Theory": when employees perceive that higher pay is achievable through performance, it incentivizes effort rather than resentment.

https://www.hbs.edu/ris/Publication%20Files/18-007_182aaa61-979e-4f84-ac61-d7e3837779d6.pdf
Key Finding

Economic (merit-based) pay disparity is positively associated with firm performance (+1.46% ROA).

The Archalos Thesis

We do not advocate for flat pay; we advocate for *fair* pay. The data proves that the market pays a premium for meritocracy. If a company has a wide pay gap that is explained by performance, it signals a healthy competitive culture. We screen for the *ratio of explanation*: Does the pay gap exist because of performance, or because of privilege? The former is an asset; the latter is a liability.

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