Spinning the CEO Pay Ratio Disclosure
56 Pages Posted: 11 Nov 2019 Last revised: 17 Dec 2021
Date Written: December 15, 2021
We examine the consequences of mandating disclosure about the pay gap between the CEO and the median employee. Reporting a high pay ratio is associated with adverse changes in employee morale and productivity, which is partially offset by prior CSR investments. Firms reporting an unexpectedly high ratio take actions to downward adjust the reported metric and tend to include discretionary narrative portraying their employee relations in a positive light (i.e., “spin”). We validate these responses using several identification strategies. Prior enforcement actions by labor regulators and better recent performance temper the tendency to spin a high ratio. We find no evidence that spin attenuates the negative employee response to a high ratio disclosure. In the second year, high ratio firms are more likely to lower their reported ratio by altering the selection of their median employee. Firms with large declines in the pay ratio reduce their spin.
Keywords: Pay ratio, human capital disclosure, mandatory disclosure, CSR, ESG, greenwashing
JEL Classification: G38, J31, J58, M12, M48, M52
Suggested Citation: Suggested Citation