Investor Reactions to Company Disclosure of High CEO Pay and High CEO-to-Employee Pay Ratio: An Experimental Investigation

Kelly, Khim; Seow, Jean Lin

doi:10.2308/jmar-51392

Cited by 42 publications

(22 citation statements)

References 49 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Specifically, as of 2017, Section 953(b) of the Dodd‐Frank Act requires disclosure of median employee pay and its ratio to CEO pay, thereby opening up the possibility to relate executive compensation to estimated inputs of employees and executives. An experiment by Kelly and Seow () suggests that distributive justice aspects of compensation disclosure can negatively affect participants’ judgements of CEO pay fairness and perceived workplace climate but simultaneously increase the expected ability to attract and retain CEO talent.…”

Section: Introductionmentioning

confidence: 99%

What is a fair amount of executive compensation? Outrage potential of two key stakeholder groups

Arnold

Grasser

2018

Business Fin & Account

View full text Add to dashboard Cite

The public discussion of executive compensation often centres on 'fair' and 'unfair' amounts and the public outrage over compensation that is deemed too high. The academic literature states that such outrage can lead to outrage costs, pressuring firms to adjust compensation levels. However, it is unclear what a 'fair' compensation is for various stakeholders and how their fairness concerns relate to outrage constraints. Based on surveys among two key stakeholder groups (representative eligible voters and investment professionals), we provide evidence that fairness is an important criterion for both groups but that opinions on how large a fair compensation amount should be are widely dispersed. Moreover, personality traits systematically influence fairness opinions through self-serving interpretations of distributive justice and personal risk attitudes, indicating that a 'fair' amount of executive compensation may strongly depend on the involved stakeholders. Investigating thresholds for outrage, i.e., amounts above which compensation is judged 'unfairly' high, we show that even though investment professionals care for fairness as well, 'capital market outrage' might not equate to 'public outrage' . Our paper contributes to the literature on outrage constraints by linking individual fairness concerns to outrage potential and has implications for transparency of executive compensation and research on shareholder activism.

show abstract

Section: Introductionmentioning

confidence: 99%

What is a fair amount of executive compensation? Outrage potential of two key stakeholder groups

Arnold

Grasser

2018

Business Fin & Account

View full text Add to dashboard Cite

show abstract

“…They declared that by the time shareholders are eager to sell their shares, they trigger short-term motivations in directors to maximize current share values. Kelly & Seow (2016) investigated the pays to CEOs in comparison with the industries' median. They demonstrated that too high disclosure in industries cause marginally reductions in the understanding of rewards' fairness.…”

Section: Transparency and Quality Of Financial Informationmentioning

confidence: 99%

Board compensation and disclosure quality: corporate governance interference

Salehi¹,

Jamalikazemini²,

Farhangdoust

2018

CyA

View full text Add to dashboard Cite

This paper investigates the impact of financial information disclosure quality on board compensation in various corporate governance mechanisms in Iran. A unique data set from a sample of 176 Iranian listed firms over the period 2010-2016 is used in order to address the following questions: as an incentive mechanism for managers, is there any relationship between compensation and disclosure quality of financial information while some corporate governance factors are interfered? Duality on board, educated members, females, and independent members are the aspects that are considered as corporate governance interference. Along with these issues, we investigate whether firm complexity is likely to affect the mentioned relationship. We find that corporate governance mechanisms including educated board members, independent members, females, and board members duality are not some reward-enhancing methods. This lends support to the conjecture that directors neglect the quality of information they provide, and as a consequence, they adjust their bonuses via other methods. Our findings indicate that there is a significant and positive relationship between board compensation and disclosure quality in firms which have complex activities and foreign sales. Finally, we indicate that disclosure quality has no significant impact on compensation in firms which have complex activity of controlling some subsidiaries.

show abstract

“…Advocates of the DFA pay-equity disclosure contend that the increased transparency of CEO pay will improve companies’ accountability to their stakeholders (Adut et al , 2013), curtail excessive executive pay relative to their performance (Djankov et al , 2008) and provide public pressure to reduce excessive executive salaries (Mas, 2014). Others believe that the increased transparency of CEO pay dispersion[1] may have negative consequences such as increasing the perceived unfairness of compensation among employees (Kelly and Seow, 2016, 2018), which has been associated with low employee morale (Hamilton, 2011).…”

Section: Introductionmentioning

confidence: 99%

“…Finally, existing research has focused primarily on the effects of the DFA CEO compensation disclosure requirement from the investor perceptive (Kelly and Seow, 2016, 2018), while the possible impact of the disclosure on employee behavior remains unexamined. Regulators should consider how the increased availability of CEO pay-equity information may impact the behavior of all stakeholders, including employees when weighing the benefits against the costs of the DFA.…”

Section: Introductionmentioning

confidence: 99%

The effect of CEO friendship and perceived pay equity on the earnings management behavior of business-unit managers

Gouldman

Victoravich

2020

MAJ

View full text Add to dashboard Cite

Purpose The purpose of this study is to examine the possibility of adverse consequences regarding the recently enacted Dodd–Frank Act (DFA) pay-equity disclosure requirement in the USA, which will likely lead to lower levels of perceived Chief Executive Officer (CEO) pay fairness by subordinates. Specifically, the study examines whether the pay-equity disclosure leads to increased earnings management when business-unit managers have friendship ties with the CEO. Design/methodology/approach An experiment is conducted wherein participants assume the role of a business-unit manager and are asked to provide an estimate for future warranty expense, which is used as a proxy for earnings management. The study manipulates friendship between the CEO and a business-unit manager and the saliency of CEO compensation pay-equity. Findings CEO friendship ties, which are associated with lower levels of social distance, result in less earning management in the absence of the DFA CEO pay-equity ratio disclosure. However, CEO friendship may result in negative repercussions in terms of higher earnings management in the post-DFA environment when managers are provided with the pay-equity disclosure. Research limitations/implications Future research may expand this study by examining how the adverse consequences of the CEO compensation saliency disclosure can be mitigated. Practical implications Management, audit committees and internal auditors should consider the possibility of unintended consequences of the increased transparency of CEO pay-equity while designing management control systems. Social implications This study highlights the importance of understanding how employees’ social relationships with leaders may influence their behavior. Originality/value Unlike prior research, which focuses on senior executives’ direct incentives to manipulate earnings and subsequently increase their compensation, this study provides evidence regarding the earnings management behavior of business-unit managers.

show abstract

Investor Reactions to Company Disclosure of High CEO Pay and High CEO-to-Employee Pay Ratio: An Experimental Investigation

Cited by 42 publications

References 49 publications

What is a fair amount of executive compensation? Outrage potential of two key stakeholder groups

What is a fair amount of executive compensation? Outrage potential of two key stakeholder groups

Board compensation and disclosure quality: corporate governance interference

The effect of CEO friendship and perceived pay equity on the earnings management behavior of business-unit managers

Contact Info

Product

Resources

About