Rethinking Measurement of Pay Disparity and Its Relation to Firm Performance

Ethan  Rouen

Article | Accounting Review | January 2020

Rethinking Measurement of Pay Disparity and Its Relation to Firm Performance

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

Find at Harvard

Citation:

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

TJX Companies reported a CEO pay ratio of 1,596-to-1 in 2019, leaving board chair Carol Meyrowitz with a host of questions about whether, and how, she could take action to address concerns raised by having one of the highest pay ratios in the S&P 500. As a retail company, TJX had 270,000 employees, many making about $10 an hour. On the other hand, CEO Ernie Hermann made $19 million in 2019 as he successfully steered the company through the tumultuous retail environment. Meant to be read in tandem with the research note “Income Inequity and Income Inequality,” this case examines the current disclosures companies make related to income inequality and asks whether they are sufficient or how they can be improved. This discussion around disclosure also provides opportunities to examine the role of the firm in creating income inequality and how the firm should balance its obligations to shareholders and employees when those obligations may be in conflict. Lastly, the case and note address the CEO pay setting process to give students an understanding of how pay is determined.

Tiffany Pham taught herself to code and created a technology platform, Mogul, with the goal of providing girls and women around the world with information and opportunities. After several years Mogul had reached more than 146 million women around the world and had measurable outcomes in increasing the diversity of talent pipelines for major Fortune 500 companies that served as its clients. The case explores Pham’s journey in building Mogul and the idea of moving into other business lines, such as media or venture capital, making Mogul not just a place for people to connect but also a global brand.

Faculty & Research

Rethinking Measurement of Pay Disparity and Its Relation to Firm Performance

Abstract

Citation:

About the Author

More from the Author