Why do firms disclose a Supplementary CEO-employee Pay Ratio? Initial evidence from Dodd-Frank Act Section 953 (b)
52 Pages Posted: 18 Aug 2018 Last revised: 3 Dec 2018
Date Written: August 18, 2018
Section 953 (b) of the Dodd-Frank Act requires all listed firms to disclose a CEO-employee Pay Ratio. Firms are permitted certain discretions in the Pay Ratio calculation and can disclose a Supplementary Pay Ratio if necessary. In this paper, we analyze initial CEO-employee Pay Ratio data disclosed from January to July 2018 by 1,125 firms in the S&P 1500 Index. We examine whether firms disclose a Supplementary Pay Ratio to inform stakeholders of the Pay Ratio more transparently or to manage stakeholder perceptions of the Pay Ratio. We find evidence consistent with both informational and opportunistic motives driving the Supplementary Pay Ratio disclosure. Furthermore, firms appear to consider two different kinds of political costs—the political costs of disclosing a high Pay Ratio and the political costs of disclosing a supplementary “downward” Pay Ratio. Finally, we find that some firms disclose a Supplementary Pay Ratio higher than the Required Pay Ratio to signal the existence of stronger tournament incentives for labor market considerations.
Keywords: CEO-employee Pay Ratio, CEO Pay Ratio, Supplementary Pay Ratio, Pay Ratio Disclosure
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