The effect of CEO-to-worker pay disparities on CEO compensation: The mediating role of shareholder say on pay votes

In response to large pay disparities caused by rising CEO compensation and stagnant employee pay, US financial regulators have taken several initiatives to mobilise shareholders. However, the ability of these initiatives to enhance shareholder engagement and reduce excessive CEO compensation has been questioned. Using a large sample of 1594 non-financial firms from the Russell 3000 index over 2013–2019, we disentangle the complex role that shareholder engagement towards CEO-to-worker pay disparities plays on CEO compensation. We find that higher CEO-to-worker pay disparities increase shareholder dissent say on pay votes and that, paradoxically, shareholder dissent say on pay votes increase CEO compensation. Furthermore, we provide evidence that shareholder engagement mediates the relationship between CEO-to-worker pay disparities and CEO compensation through their say on pay votes. Our findings are consistent with the relative deprivation theory as shareholders react to large pay disparities to avoid the negative consequences of a feeling of deprivation on employees. They are also in line with the agency theory, as shareholder reactions to large CEO-to-worker pay disparities trigger reactions from the remuneration committee to better align CEO pay with their interests. Overall, our findings support the existence of a shareholder engagement channel driven by social comparison mechanisms and agency responses. This study has important implications for regulators by unpacking the usefulness of these regulatory initiatives to shareholders and also documenting their unintended consequences on CEO compensation.