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

Abstract

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

Rouen, Ethan, Rethinking Measurement of Pay Disparity and its Relation to Firm Performance (February 21, 2019). Forthcoming: The Accounting Review, DOI: 10.2308/accr-52440. Available at SSRN: https://ssrn.com/abstract=2867041 or http://dx.doi.org/10.2139/ssrn.2867041

Ethan Rouen (Contact Author)

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6275 (Phone)

HOME PAGE: http://www.ethanrouen.com

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