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Discretion in pay ratio estimation

Author

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  • Alam, Zinat
  • Ghosh, Chinmoy
  • Ryan, Harley E.
  • Wang, Lingling

Abstract

We examine how firms estimate CEO-employee pay ratios in response to the CEO pay ratio rule, the first mandated pay inequality disclosure for U.S. firms. Our findings reveal that firms disclose lower pay ratios when they use more complex methods to identify the median employee. The relation between the estimation method and the disclosed pay ratio is stronger for firms headquartered in states with a greater societal aversion to income inequality and is weaker when CEO pay in the prior year is lower. Firms’ estimation choices do not merely represent selection bias or potentially omitted variables such as firm size, industry, compensation design complexity, or workforce composition – including the presence of foreign, temporary, seasonal, or highly paid employees. Although firms that use more complex methods to identify the median employee disclose lower pay ratios, we find no evidence of real changes in pay inequality among these firms. Our results suggest that some firms use estimation discretion to appear to conform to stakeholders’ preferences instead of taking real actions. These practices call into question the informativeness of CEO pay ratio disclosures, highlighting a potential cost of granting discretion in mandatory ESG disclosures.

Suggested Citation

  • Alam, Zinat & Ghosh, Chinmoy & Ryan, Harley E. & Wang, Lingling, 2025. "Discretion in pay ratio estimation," Journal of Banking & Finance, Elsevier, vol. 173(C).
    • Handle: RePEc:eee:jbfina:v:173:y:2025:i:c:s0378426625000366
    DOI: 10.1016/j.jbankfin.2025.107416
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    More about this item

    Keywords

    CEO pay ratio; Disclosure estimation method; ESG disclosure; Disclosure discretion; Income inequality aversion; Social attitudes;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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