Presentation on theme: "THE CEO PAY RATIO: WHY LARGE DIFFERENCES IN PAY WITHIN A COMPANY UNDERMINE LONG-TERM RETURNS Spring 2014."— Presentation transcript:
THE CEO PAY RATIO: WHY LARGE DIFFERENCES IN PAY WITHIN A COMPANY UNDERMINE LONG-TERM RETURNS Spring 2014
W HY I NTERNAL I NEQUALITY M ATTERS F OR L ONG -T ERM S HAREHOLDERS Why we should expect the CEO Pay Ratio to be associated with long- term shareholder returns: 1.CEO Pay relative to the average wage has climbed sharply even as long-term real returns have stagnated. 2.Empirical analysis in management, human resources, and psychology point toward relative pay levels within an organization as a key element developing employee engagement and promoting productivity. 3.Our own analysis of historical estimated CEO Pay Ratios shows that companies with high ratios produce lower long-term shareholder returns.
CEO P AY S OARS R ELATIVE TO A VERAGE W AGE W HILE S HAREHOLDER R ETURNS S TAGNATE
T HE M ANAGEMENT L ITERATURE A substantial body of academic research in human resources, management, and psychology points to inequality in pay within firms as a barrier to top performance: Less well paid employees respond more to a given pay increase than highly paid employees. Perceived fairness of pay decisions is crucial in generating positive effects from changes in pay practices. Employees view fairness of pay primarily in relative terms “Because how people feel about their pay is a result of comparative processes, organizations with huge variance between executive and employee pay practices are likely to be populated with workers eagerly awaiting opportunities to move to other organizations.” Rynes, Gerhart, & Minette, Human Resource Management, Winter 2004
CEO P AY R ATIO R EGRESSION A NALYSIS We also regressed our excess return measure on the 2007 CEO Pay Ratio, the 2007 market capitalization, and the 2007 Market-to-Book ratio, 2006-2007 momentum, and a variety of other controls. We found a statistically significant (above the 99% level), negative relationship between CEO Pay Ratio and the excess return from 2007-2012, such that an increase in the CEO Pay Ratio of 10 is associated with a reduction in the cumulative excess return of 1.08% (108 bp). Regression Statistics Multiple R0.360 R Square0.129 Adjusted R Square0.098 Standard Error1.125 Observations459 CoefficientsStandard Errort StatP-valueLower 95%Upper 95% Intercept0.154610.467130.330980.74081-0.763461.07269 2007 CEO Pay Ratio-0.001080.00039-2.786760.00555-0.00184-0.00032 Market Cap0.00000 -1.609810.108150.00000 Market to Book-0.000090.00008-1.131950.25827-0.000250.00007 Momentum (2006)0.758840.224783.375860.000800.317061.20061 2006 EPS % Growth-0.007880.02105-0.374590.70815-0.049250.03348 Debt/TCE0.00001 0.835070.40413-0.000010.00003 Consumer Discretionary0.560710.480721.166380.24409-0.384071.50549 Consumer Staples0.432630.497930.868850.38540-0.545971.41123 Energy0.255040.495960.514240.60734-0.719681.22977 Financials-0.394000.47718-0.825680.40943-1.331810.54382 Healthcare0.713600.487961.462430.14433-0.245401.67260 Industrials0.251790.483090.521200.60249-0.697641.20121 Information Technology0.118740.482660.246010.80579-0.829851.06733 Materials0.431980.506020.853690.39374-0.562521.42649 Telecommunication Services0.00000 65535.0.00000 Utilities-0.103750.50354-0.206030.83686-1.093370.88588
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