Rethinking Measurement of Pay Disparity and Its Relation to Firm Performance

Ethan  Rouen

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Article | Accounting Review | January 2020

Rethinking Measurement of Pay Disparity and Its Relation to Firm Performance

by Ethan Rouen

Abstract

I develop measures of firm-level pay disparity and examine their relation to firm performance. Using comprehensive compensation data for a large sample of firms, I find no statistically significant relation between the ratio of CEO-to-mean employee compensation and performance. I next create empirical models that allow me to separate the components of CEO and employee compensation explained by economic factors from those that are not and use these models to estimate explained and unexplained pay disparity. After validating my estimate of unexplained pay disparity as a proxy for pay fairness, I find robust evidence of a negative (positive) relation between unexplained (explained) pay disparity and future firm performance.

Keywords: pay disparity; pay ratio; CEO pay ratio; income inequality; Executive Compensation; Employees; Wages; Equality and Inequality; Business Ventures; Performance;

Format: Print

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Citation:

Rouen, Ethan. "Rethinking Measurement of Pay Disparity and Its Relation to Firm Performance." Accounting Review 95, no. 1 (January 2020): 343–378.

About the Author

Ethan C. Rouen

Assistant Professor of Business Administration

Accounting and Management

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Rethinking Measurement of Pay Disparity and Its Relation to Firm Performance

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