High Pay Ratio Impacts Say-on-Pay…But “Spin” Won’t Help
A recent paper from three B-School Profs might confirm what many people in our community have been advising: don’t over-explain your pay ratio. The research also suggests that high pay ratios are impacting say-on-pay & employee productivity. Here’s an excerpt:
We find that firms with higher pay ratios receive greater dissent on SOP proposals and have a higher likelihood of failing to receive majority support. These findings reinforce extant studies showing that SOP is a means for shareholders to express dissatisfaction with executive compensation practices (e.g., Cai and Walkling, 2011; Brunarski, 2015) and on vertical pay disparity at U.S. banks (Crawford et al., 2019).
We next explore changes in labor productivity, as prior work links employee pay disclosure to worker satisfaction and productivity (Card et al., 2012). We find that employee productivity gains are lower following the initial disclosure of a high pay ratio. These findings are consistent with the notion that larger pay differences between top managers and employees could reduce employee morale, leading to lower productivity (Rees, 1993; Green and Zhou, 2019). We find that most of the negative stakeholder outcomes arise from reporting an unexpectedly high pay ratio and when the value is larger than the majority of its industry peers.
We also present regression results that include the pay ratio and separate controls for CEO and median employee compensation. For most tests, we find the ratio has significant explanatory power beyond compensation levels, suggesting that it contains unique and informative content for stakeholders.
-Liz Dunshee, CompensationStandards.com January 9, 2020
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