The CEO Pay Ratio (the “Ratio”) is a controversial disclosure required for publicly traded companies. It requires those companies to disclose the compensation of the CEO compared to the compensation of the median employee, without including the CEO and his or her compensation. There have been many issues surrounding its computation and whether it is even a meaningful disclosure at all. What made this topic fertile ground for research was its newness. Public companies began disclosing this ratio in 2017, so there is only three years of data available.
Professor Daniel O’Connor (also at Moravian College) and I were privileged to be faculty advisors for two honors projects dealing with this subject. The first was completed by Alex Tursi, who graduated from Moravian College in 2020. Alex analyzed the Ratio disclosure for first two years it was required. The second was a follow-on project by Delia Geyer, who graduated in 2021. Delia added a third year of data to the project and also analyzed the impact of certain social justice issues on the Ratio. Alex and Delia focused their attention on the companies composing the three Dow Jones indexes because they are often bellwethers in the financial statement disclosures. They are also sui generis companies. Their sheer size sets them apart from other companies and makes them worthwhile subjects of analysis.
Professor O’Connor and I are proud of the work done by these two young scholars. Working my themselves, they were on the cutting edge of research into this new topic. Both students received honors for their project. Their posters and abstracts follow on the succeeding pages.
Postscript: Richard Thaler won the Nobel Prize in Economics in 2017 for his work in behavioral economics. When reading his book Misbehaving (a wonderfully written commentary on the state of modern economic theory), I came across the following quote of page 30: “William Baumol…postulated that firms maximize their size subject to a constraint that profits have to meet some minimum level…it might be smart for a CEO to follow this strategy, since CEO pay oddly seems to depend on so much as a firm’s size as it does on its profits….” There are NO footnotes to this passage. In short, this is conjecture on Thaler’s part. Well, our two students have some produced some empirical evidence…