The CEO-Employee Pay Ratio

39 Pages Posted: 22 Nov 2014  

Steve Crawford

University of Houston

Karen K. Nelson

Texas Christian University - Department of Accounting

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Date Written: November 21, 2014

Abstract

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

Suggested Citation

Crawford, Steve and Nelson, Karen K. and Rountree, Brian, The CEO-Employee Pay Ratio (November 21, 2014). Available at SSRN: https://ssrn.com/abstract=2529112 or http://dx.doi.org/10.2139/ssrn.2529112

Steve Crawford

University of Houston ( email )

Houston, TX 77204
United States

Karen K. Nelson (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

Brian Robert Rountree

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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