Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform

66 Pages Posted: 24 Oct 2019 Last revised: 31 Dec 2020

See all articles by Wonjae Chang

Wonjae Chang

University at Buffalo, SUNY

Michael Dambra

SUNY at Buffalo - School of Management

Bryce Schonberger

University of Colorado at Boulder - Leeds School of Business

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management; Korea University Business School (KUBS)

Date Written: December 30, 2020

Abstract

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

Chang, Wonjae and Dambra, Michael and Schonberger, Bryce and Suk, Inho, Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform (December 30, 2020). Available at SSRN: https://ssrn.com/abstract=3470215 or http://dx.doi.org/10.2139/ssrn.3470215

Wonjae Chang

University at Buffalo, SUNY ( email )

3435 Main Street
Buffalo, NY 14214
United States

Michael Dambra (Contact Author)

SUNY at Buffalo - School of Management ( email )

354 Jacobs Management Center
Buffalo, NY 14260-1660
United States
716-645-3237 (Phone)

Bryce Schonberger

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management ( email )

342 Jacobs Management Center
Buffalo, NY 14260-4000
United States
716-645-3215 (Phone)

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

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