Should the CEO Pay Ratio be Regulated?

Anginer, Deniz, Liu, Jinjing, Schipani, Cindy A. and Seyhun, H. Nejat, Should the CEO Pay Ratio Be Regulated? 45 Journal of Corporation Law (Forthcoming)

45 Pages Posted: 2 Oct 2019 Last revised: 20 Mar 2020

See all articles by Deniz Anginer

Deniz Anginer

Simon Fraser University (SFU)

Jinjing Liu

The World Bank Research Group

Cindy A. Schipani

University of Michigan, Stephen M. Ross School of Business

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business

Date Written: March 28, 2019

Abstract


Starting from January 2017, all publicly listed firms in the United States are required to disclose a pay ratio of annual CEO compensation to the median employee compensation (Pay Ratio). Opponents of this legislation have argued that this additional Pay Ratio disclosure would simply add to the costs of compliance without providing any new information to the market over and above the existing CEO Pay Slice variable, known as the ratio of CEO’s pay to top five executives’ compensation. Using hand-collected data, this paper finds that both variables are related to CEO power, but the Pay Ratio variable provides new and additional information over and above the Pay Slice variable. Furthermore, the Pay Ratio variable is more informative about the agency costs excessive CEO power imposes on shareholders. The cost of capital increases significantly as Pay Ratio increases and Pay Ratio dominates and eliminates the explanatory power of Pay Slice. Our empirical finding suggests that to understand the costs imposed on shareholders by excessive CEO power, we also need to pay attention to the Pay Ratio variable.

Keywords: Pay ratio; Pay slice; CEO power; Cost of capital

JEL Classification: G38, G34, K22

Suggested Citation

Anginer, Deniz and Liu, Jinjing and Schipani, Cindy A. and Seyhun, H. Nejat, Should the CEO Pay Ratio be Regulated? (March 28, 2019). Anginer, Deniz, Liu, Jinjing, Schipani, Cindy A. and Seyhun, H. Nejat, Should the CEO Pay Ratio Be Regulated? 45 Journal of Corporation Law (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3457527

Deniz Anginer

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Jinjing Liu (Contact Author)

The World Bank Research Group ( email )

1818 H ST nw
WASHINGTON, DC, DC 20433
United States

Cindy A. Schipani

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
(734) 763-2257 (Phone)
(734) 763-2257 (Fax)

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5463 (Phone)

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