Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform

Abstract

Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer’s (CEO) compensation to their median employee’s compensation in the annual proxy statement. Exploiting the staggered reporting of pay ratios, we find little evidence that total CEO compensation changes in response to pay ratio disclosure reform. However, we do find that boards significantly adjust the mix of compensation awarded by reducing the sensitivity of CEO pay to equity price changes, particularly when the CEO is likely to garner media scrutiny, and by reducing reliance on stock-based and other compensation components that are most susceptible to media coverage surrounding the pay ratio disclosure. Firms ultimately disclosing higher pay ratios garner more media coverage around the filing of their proxy statement, and more negative-toned coverage in the subsequent month. Firms with compensation-related media coverage also display negative abnormal returns around their proxy filing dates. Finally, we find evidence that greater pay disparity is associated with greater selling activity by retail investors and more negative say-on-pay votes following pay ratio reform, suggesting a broad set of investors responds to public scrutiny resulting from pay ratio disclosures.

The internet appendix for this paper is available at the following URL:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3979898

Keywords: CEO compensation, pay ratio, disclosure, pay-for-performance, media coverage

JEL Classification: G34, G38, M12, M52