In recent years, the ever-widening chief executive officer (CEO) and worker pay gap has become a topic that has been drawing significant public attention. For example, in 2018 Wells Fargo employees publicly criticized their CEO for compensation that was almost 300 times the median worker’s salary and demanded pay raises as a way of rebuilding the bank’s community trust.
That’s why Mei Cheng, associate professor of accounting in the Eller College of Management, along with Yuan Zhang of the University of Texas Dallas, has co-authored a study on the pay gap titled Corporate Stakeholders and CEO-Worker Pay Gap: Evidence from CEO Pay Ratio Disclosure. This research is among the first to highlight the important roles that corporate stakeholders play in mitigating high CEO-worker pay gaps.
“Given the profound economic and social significance of income equality and distributive justice, corporate stakeholders—especially non-shareholder stakeholders like employees, communities and governments who value pay equality—have become expressly concerned about the high CEO-worker pay gap proxied by the pay ratios between CEOs and median workers,” says Cheng.
The findings in the paper suggest that the Securities and Exchange Comission’s (SEC) newly adopted CEO pay ratio disclosure rule—which requires listed firms to disclose the ratio of CEO compensation to the median worker compensation for fiscal years beginning on or after January 2017— provides incremental valuable information and has a substantial impact on corporate pay practices. Before the mandate was established, firms were only required to disclose CEO compensation.
“We show that firms have the tendency to ‘conform to norms’ with respect to CEO pay ratios after the mandatory disclosures of these ratios,” says Cheng. “These results are consistent with these stakeholders’ emphasis on pay equality and distributive justice and their active impacts on social welfare when the pay gap is high.”
Cheng notes that because of the economic and social implications of corporate pay practices, this study could be of interest to politicians, regulators, corporate executives, stakeholders, as well as the general public who care about wealth distribution in the workplace.