The CEO-Employee Pay Ratio
39 Pages Posted: 22 Nov 2014
Date Written: November 21, 2014
We examine the ratio of CEO to employee pay (the pay ratio) for a broad panel of U.S. commercial banks. For the vast majority of the sample, pay ratios are substantially lower than the levels popularized in the financial press. Firms with extreme high pay ratios are riskier, perform worse, and experience greater dissent on shareholder “say on pay” (SOP) proposals. However, there is an overall concave (convex) relation between the pay ratio and future operating performance (risk and SOP voting dissent). Our results are robust to controlling for the endogenous nature of pay ratios and a variety of other sensitivity tests. We also decompose the pay ratio into two components: (i) CEO to executive team pay and (ii) executive team to average employee pay. In all tests, the effects of pay disparity between the executive suite and the average employee are incremental to the effects of pay disparity within the executive suite.
Keywords: Pay ratios, Say on pay, Executive compensation, Tournament incentives, Equity fairness, Dodd-Frank Act
JEL Classification: D33, G21, G32, G38, J33, K22
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