Why Do Firms Disclose a Supplementary CEO-to-Median Worker Pay Ratio? Initial Evidence from Dodd Frank Act Section 953 (b)

Jung, Sun Moon; Kim, Natalie Kyung Won; Ryu, Han Seong; Shin, Jae Yong

doi:10.2139/ssrn.3234013

Cited by 6 publications

(8 citation statements)

References 55 publications

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“…This result is the strongest in financially constrained, labor intensive and small-to-medium sized firms. Jung et al (2018) examine pay ratio for 1,125 S&P 1500 firms. They differentiate between required and supplementary pay ratios (with 14% of the firms in their sample provide a supplementary pay ratio) to test which firms are more likely to disclose supplementary pay ratio.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

CEO-to-employee pay ratio and CEO diversity

Alan

Bardos

Shelkova

2020

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PurposeThe motivation behind Section 953(b) of Dodd–Frank Act was the increasing pay inequality and supposed CEOs' rent extraction. It required public companies to disclose CEO-to-employee pay ratios. Using the ratios reported by S&P 1500 firms in 2017–18, this paper examines whether companies led by women and minority CEOs have lower ratios than those led by white male CEOs.Design/methodology/approachThis paper uses multivariate regression along with a matched sample analysis to examine whether female and minority CEOs have higher CEO-to-employee pay ratios compared to male and white CEOs, controlling for other determinants of pay ratios.FindingsResults indicate that CEO-to-employee pay ratios are 22–28% higher for female CEOs compared to their male counterparts, controlling for other determinants of pay ratios. There is, however, no statistically significant difference between the pay ratios of minority vs white male CEOs. Minority female CEOs have lower CEO-to-employee pay ratios than white female CEOs. Consistent with literature, larger and more profitable firms have higher CEO-to-employee pay ratios.Originality/valueWhile prior studies on determinants of CEO-to-employee pay ratios have used either industry-level or self-reported data for a small subset of firms (resulting in selection bias), this paper uses firm-level data that are available for all S&P 1500 firms due to new disclosure requirements due to the Dodd–Frank Act Section 953(b). Moreover, this is the first paper to test whether gender or ethnicity of a CEO affects within-firm pay inequality.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

CEO-to-employee pay ratio and CEO diversity

Alan

Bardos

Shelkova

2020

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“…Firms can signal their desire to attract quality executive managers by revealing their tournament incentives to the market (Jung et al, 2018; Kale, Reis, & Venkateswaran, 2009; Siegel & Hambrick, 2005). Following the predictions of tournament theory, a high CEO pay ratio relative to the industry average ratio sends a signal to the market that the firm seeks and maintains top talent (Pissaris et al, 2017; Jung et al, 2018). Thus, directors would view a high CEO pay ratio relative to the industry average as beneficial to the firm because it demonstrates a commitment to quality leadership and sends positive signals to the market for executive managers.…”

Section: Theory and Hypothesesmentioning

confidence: 99%

“…Unexplained pay differences between an overpaid CEO and underpaid average employees also negatively affect subsequent firm performance, especially when the firms are monitored by a weak corporate board (Rouen, 2020). Third, Jung, Kim, Ryu, and Shin (2018) provide evidence that directors are aware of the threats created by signals of pay inequity. The authors find that firms are more likely to disclose supplementary pay ratio information when boards perceive greater needs to reduce stakeholder concerns about pay disparity.…”

Section: Theory and Hypothesesmentioning

confidence: 99%

“…Compensation is set to incentivize all qualified executives below the CEO rank to exert greater effort and be more productive during their tenure prior to winning the grand prize (i.e., the CEO position) (Casas-Arce & Martínez-Jerez, 2009). Firms can signal their desire to attract quality executive managers by revealing their tournament incentives to the market (Jung et al, 2018;Kale, Reis, & Venkateswaran, 2009;Siegel & Hambrick, 2005).…”

Section: Tournament Versus Equity Theory and The Ceo Pay Ratiomentioning

confidence: 99%

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An investigation of corporate directors' responses to CEO pay ratio disclosures and say‐on‐pay votes

Norman

Rose

et al. 2020

Human Resource Management

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The purpose of this study is to shed light on the effects of the CEO pay ratio and say‐on‐pay votes on directors' concerns about CEO pay equity. Investigation of the pay ratio disclosure rule offers opportunities to gain insights into whether equity perceptions associated with mandated pay ratio disclosure have significant effects on remuneration decisions in organizations. We conduct an online experiment with practicing corporate directors to examine the effects of CEO pay ratio disclosures and say‐on‐pay (SOP) votes on director decisions. Results indicate that CEO pay ratio disclosures significantly influence directors' decisions regarding executive compensation, leading directors to be less willing to increase CEO pay when the pay ratio is above the industry average pay ratio. Results also demonstrate that say‐on‐pay votes only influence directors' compensation decisions when the CEO pay ratio is above the industry average. Directors in firms with pay ratios that are above the industry average are less willing to increase CEO pay when they anticipate shareholder votes against a CEO pay increase than when they anticipate positive SOP voting outcomes. Directors in firms with CEO pay ratios that are below the industry average, however, are willing to increase CEO pay regardless of SOP voting outcomes.

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“…Related studies making use of this data set include Bardos, Ertugrul, and Kozlowski (2020), who examine the determinants of CEO-to-employee pay ratio and its effect on productivity and firm performance, and Alan, Bardos, and Shelkova (2020), who examine if CEO gender explains CEO-to-employee pay ratio. Additionally, Jung, Kim, Ryu, and Shin (2018) examine which firms are more likely to disclose a supplementary pay ratio and the incentives for doing so.…”

mentioning

confidence: 99%

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

Bardos

Kozlowski

Puleo

2021

The Financial Review

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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.

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Why Do Firms Disclose a Supplementary CEO-to-Median Worker Pay Ratio? Initial Evidence from Dodd Frank Act Section 953 (b)

Cited by 6 publications

References 55 publications

CEO-to-employee pay ratio and CEO diversity

CEO-to-employee pay ratio and CEO diversity

An investigation of corporate directors' responses to CEO pay ratio disclosures and say‐on‐pay votes

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

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