CEO Pay Ratio Estimation under Social Pressure

Abstract

We show that firms report lower CEO-employee pay ratios when they use complex methods to identify the median employee, whose total pay is the denominator in the ratio. Firms choose complex methods when their headquarter states have stronger prosocial attitudes toward income equality and when CEO compensation is higher. Neither industry nor compensation design differences explain this choice. We find no evidence that firms make pay changes to reduce the pay differential between CEOs and general employees. Together, our results suggest that some firms strategically estimate pay ratios in response to social pressure, which alters the efficacy of compensation disclosure.