Executive Compensation: CEO Pay Ratio and the impacts of mandatory disclosure

The growing compensation gap between CEOs and employees has generated considerable debate. From 1978 to 2018, CEO compensation grew by 1,007.5% far outstripping S&P stock market growth (706.7%) and the wage growth of very high earners (339.2%).

In contrast, wages for the typical worker grew by just 11.9%. Despite interest in the topic, assessing the pay disparity has been difficult due to the lack of public disclosure about employee compensation. However, employee compensation was recently enhanced when the SEC in 2018 adopted the CEO Pay Ratio Rule requiring most reporting companies to provide new disclosures of the median employee’s pay and a ratio comparing the CEO’s compensation with this value.

Proponents of the rule argue the disclosure highlights within-firm pay issues that could be important to investors, customers, and employees. Critics contend, however, that the ratio provides little value due to managerial discretion in identifying median employees and computing their pay. Moreover, organizational differences could limit the comparability of the ratio across companies, including those within the same industry.

A number of questions arise from the mandatory disclosure. Has executive compensation been affected by the added disclosure? Do peer firms in the same industry report similar ratios? Has disclosure affected Say on Pay votes? 

If this area of research is on interest to you, you may consider undertaking an Honours project on this topic.

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