Entrenchment or efficiency? CEO‐to‐employee pay ratio and the cost of debt

Abstract

Using new data on S&P 1500 firms' chief executive officer (CEO)-to-employee pay ratios disclosed by mandate of Section 953(b) of the Dodd-Frank Act, we examine the effect of within-firm pay inequality on bond yield spreads.We find a significant negative relation between industryadjusted CEO-to-employee pay ratio and yield spreads while controlling for covariates and endogeneity. This result is strongest in financially constrained, labor-intensive, and small-to-medium-sized firms. The evidence supports the incentive-provision explanation of CEO-to-employee pay disparity, reflecting efficient CEO compensation rather than rent extraction. We also document selection bias in selfreported pay ratios, highlighting the efficacy of the Dodd-Frank provisions.

CEO-to-employee pay ratio and CEO diversity

“…He does find evidence of the curb in response to the SEC's proposal (but not adoption) at select firms that are more sensitive to the reputational effects of the rule. As already discussed, Bardos et al (2020) finds negative association between CEO-to-employee pay ratio and the cost of debt for S&P 1500 companies.…”

“…To the best of our knowledge, only two other papers use the CEO-to-worker pay ratio disclosed following enactment of Dodd–Frank Act. Bardos et al (2020) examine the association between the cost of debt and CEO-to-employee pay ratio and find a negative relation while controlling for covariates and endogeneity. This result is the strongest in financially constrained, labor intensive and small-to-medium sized firms.…”

When in Rome: Local social norms and income differences

“…Following Bardos et al. (2021), 15 we define labor‐intensive firms as less capital intensive. Capital intensity is measured as net property, plant, and equipment to the total number of firm employees.…”

“…A few studies have explored the factors that affect pay inequality between the CEO and rank-and-file workers. Bardos et al (2021) seek to distinguish rent-seeking versus talent explanations for pay inequality using the CWR and bond yields. They find that greater CEO-worker pay inequality (CEO-worker-pay ratio or CWR) is associated with a lower cost of debt and attribute this association to the talent explanation in CEO compensation.…”

“…1515Bardos et al. (2021) use the same measure to quantify capital intensity and labor intensity. They argue that an above median PPE/number of employees would imply high (low) capital (labor) intensity.…”