CEO Pay Ratio Estimation under Social Pressure

64 Pages Posted: 5 Feb 2021 Last revised: 2 Dec 2021

See all articles by Zinat S. Alam

Zinat S. Alam

University of North Texas, College of Business Administration, Department of Finance, Insurance Real Estate and Law

Chinmoy Ghosh

University of Connecticut - Department of Finance

Harley E. Ryan

Georgia State University - Department of Finance

Lingling Wang

University of Connecticut - Department of Finance

Date Written: November 30, 2021

Abstract

We use detailed information from the first mandated disclosure of pay inequality in U.S. firms, the CEO-employee pay ratio disclosure, to examine firms’ disclosure decisions under social pressure. We show that firms report lower pay ratios when they use more complex methods to identify the median employee, whose total pay is the denominator in the ratio. Shareholders react negatively to low pay ratios estimated by more complex methods. Firms choose more complex methods when their headquarter states exhibit stronger aversion toward income inequality, when the CEO has higher pay, and when the CEO has greater reputation concerns. Neither industry nor compensation design differences explain this choice. We find no evidence that firms make real changes to reduce the pay differential between CEOs and employees. Our results suggest that some firms strategically estimate pay ratios to conform to social norms and inform on the importance of social disclosure for stakeholder activism.

Keywords: CEO Pay ratio; Social reporting; Discretionary disclosure choices; Income inequality aversion; Strategic disclosure

JEL Classification: G38, D63, D78, M12, M14

Suggested Citation

Alam, Zinat S. and Ghosh, Chinmoy and Ryan, Harley E. and Wang, Lingling, CEO Pay Ratio Estimation under Social Pressure (November 30, 2021). Available at SSRN: https://ssrn.com/abstract=3771515 or http://dx.doi.org/10.2139/ssrn.3771515

Zinat S. Alam

University of North Texas, College of Business Administration, Department of Finance, Insurance Real Estate and Law ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Chinmoy Ghosh

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

Harley E. Ryan

Georgia State University - Department of Finance ( email )

University Plaza
35 Broad Street, Suite 1221
Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

Lingling Wang (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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