Rethinking Measurement of Pay Disparity and its Relation to Firm Performance
Forthcoming: The Accounting Review, DOI: 10.2308/accr-52440
Posted: 10 Nov 2016 Last revised: 10 May 2019
Date Written: February 21, 2019
I develop measures of firm-level pay disparity and examine their relation to firm performance. Using comprehensive compensation data for a large sample of firms, I find no statistically significant relation between the ratio of CEO-to-mean employee compensation and performance. I next create empirical models that allow me to separate the components of CEO and employee compensation explained by economic factors from those that are not, and use these models to estimate explained and unexplained pay disparity. After validating my estimate of unexplained pay disparity as a proxy for pay fairness, I find robust evidence of a negative (positive) relation between unexplained (explained) pay disparity and future firm performance.
Keywords: disclosure; CEO pay ratio; pay disparity; corporate culture; compensation
JEL Classification: G32, G35, J31, M12, M14, M52
Suggested Citation: Suggested Citation