By Ed Zwirn
When is paying the boss too much, too much?
There is mounting public concern over the rapid growth in compensation of those in the top spot at companies compared with that of the average worker.
Critics say that high CEO pay in relation to the average employee’s actually harms firms by damaging worker morale and signaling that management is looking to extract all it can.
But a new research paper to be presented at the American Accounting Association’s annual meeting next month in San Diego comes to pretty much the opposite conclusion.
Using a database of 817 firms to get information on pay ratios — which show the relationship between CEO pay and that of the median worker in a given company — the researchers found that, on average, companies with high wage disparities (defined as having a CEO/worker pay ratio in the upper 15th percentile) show a return on assets 13 percent higher than their more egalitarian counterparts.
The authors, Qian Cheng, Tharindra Ranasinghe and Sha Zhao, find in their paper that the high wage disparities currently seen at many US companies are actually “positively associated with both firm value and performance.”
The results compare the CEO pay ratios to the financial results of the following year. The authors, while admitting that their study skips a discussion of “fairness and social equity,” conclude that the high paychecks for those at the top reflect “the true cost of attracting talent.”
This academic exercise, and others like it that are probably in the research pipeline, is likely to play a key role in the intense policy debates over implementation and enforcement of regulations under the Trump administration.
One of these, coming out of the Dodd-Frank Act, would require that companies disclose their CEO pay ratios, a provision that has been fought tooth-and-nail. “I’m still trying to figure out who is interested in this other than labor unions and the media,” Peter Gleason, president of the National Association of Corporate Directors, told CFO magazine.
Implementation of the rule has been delayed until 2018, assuming it survives a review by the Securities and Exchange Commission.
Brandon Rees, deputy director of the AFL-CIO’s office of investment, says that while he disagrees with the conclusions of the paper, he intends to use the results to strengthen the case for pay ratio implementation.
“The study itself indicates that pay ratios are statistically important,” he says with a touch of irony.
“This strengthens the case for disclosure.”