Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform
66 Pages Posted: 24 Oct 2019 Last revised: 31 Dec 2020
Date Written: December 30, 2020
Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer’s (CEO) compensation to their median employee’s compensation in the annual proxy statement. We find little evidence that total CEO compensation changes in response to pay ratio disclosure reform. However, we do find that boards are willing to adjust the mix of total compensation by reducing the amount of CEO pay at risk, particularly when the CEO is subject to additional scrutiny via media coverage. These results are robust to three separate identification strategies that exploit: staggered implementation across fiscal year-ends, pay ratio disclosure exemptions, and compensation outcomes for other executives within the firm. Consistent with popular press coverage playing a role in influencing firm responses to the standard, firms disclosing higher pay ratios garner more compensation-related media coverage around the filing of their annual proxy statements and display negative abnormal returns around proxy filings in the presence of elevated media coverage. Finally, we find evidence that greater pay disparity is associated with more negative say-on-pay votes and declines in employee productivity following pay ratio reform.
Keywords: CEO compensation, pay ratio, disclosure, pay-for-performance, media coverage
JEL Classification: G34, G38, M12, M52
Suggested Citation: Suggested Citation