Investor Reactions to Company Disclosure of High CEO Pay and High CEO-to-Employee Pay Ratio: An Experimental Investigation

Posted: 21 Sep 2014 Last revised: 11 Jan 2016

Khim Kelly

University of Central Florida

Jean Lin Seow

Singapore Management University

Date Written: January 3, 2015

Abstract

There is significant debate about the usefulness of disclosing the relative pay of the CEO and the median employee (hereafter, pay ratio), as required under the yet-to-be implemented Section 953(b) of the Dodd-Frank Act in the United States. Using an experiment, we find that disclosing higher-than-industry CEO pay (relative to comparable-to-industry CEO pay) decreases perceived CEO pay fairness, does not affect perceived employee satisfaction, and increases perceived company ability to attract and retain CEO talent. Incrementally disclosing a higher-than-industry pay ratio in addition to higher-than-industry CEO pay decreases perceived CEO pay fairness and perceived employee satisfaction, and does not affect perceived company ability to attract and retain CEO talent. Finally, neither disclosing higher-than-industry CEO pay nor incrementally disclosing a higher-than-industry pay ratio affects investment potential judgments. Further analyses indicate that perceived CEO pay fairness is positively related to investment potential judgments.

Keywords: Dodd-Frank Act; CEO compensation; CEO-to-employee pay ratio; investor judgments

JEL Classification: J31, M41, M48

Suggested Citation

Kelly, Khim and Seow, Jean Lin, Investor Reactions to Company Disclosure of High CEO Pay and High CEO-to-Employee Pay Ratio: An Experimental Investigation (January 3, 2015). Singapore Management University School of Accountancy Research Paper No. 2015-30. Available at SSRN: https://ssrn.com/abstract=2498308 or http://dx.doi.org/10.2139/ssrn.2498308

Khim Kelly (Contact Author)

University of Central Florida ( email )

12744 Pegaus Dr
Orlando, FL 32816
United States

Jean Lin Seow

Singapore Management University ( email )

School of Accountancy
60 Stamford Road
Singapore, 178900

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