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  • Kurt Schmidt

CEO diversity: does it explain CEO-to-employee pay ratio?


According to the Economic Policy Institute, the CEO-to-employee pay ratio increased by 1000% in the past 40 years.


US public firms were mandated to report on this gap by the 2010 Dodd-Frank Act, with the first gap data becoming available in 2017.


A recent report examines the effect of CEO gender and minority status on the size of the compensation gap between a firm’s CEO and its average worker.


Kamala Harris’ election as US Vice-President has drawn attention to the fact that female and minority leaders are underrepresented in all walks of life. This is especially evident in the corner office of US companies. Despite their unique leadership qualities, data from 2017-2018 for S&P 1500 firms shows that women hold only 5%, and minority representatives only 7% of CEO positions. Recently, the TIAA named Thasunda Brown Duckett as its CEO, only the second-ever Black female chief executive in the Fortune 500.


While diverse leadership is sought out to mirror customer base as well as the labour force, it can also potentially address the problem of growing income inequality, which many believe is the byproduct of crises in corporate governance and rapidly growing executive compensation. In our paper, CEO-to-employee pay ratio and CEO diversity, recently published in the journal Managerial Finance, we examine the effect of CEO gender and minority status, on the size of the gap between the compensation of a firm’s CEO and its average worker.


CEO-to-employee pay ratio increased nearly 1000% in the last 40 years according to the Economic Policy Institute, widening the gap between average Americans and the top 1%. Reporting of this gap by US public firms was mandated by the 2010 Dodd-Frank Act, with the first gap data becoming available in 2017. The paper explores how female and minority CEOs, given their background, may have “softer” management styles and approaches to personnel issues, which may translate to more equitable pay and lower CEO-to-employee pay ratios.


However, the results are mixed. The analysis of 2017-2018 S&P 1500 data showed that an average CEO earned 202 times the pay of a median worker, while a female CEO stood at 374 times, and a minority CEO at 173 times (see figure above). The difference between CEO-to-employee pay ratio for minority and majority CEO is not statistically significant. CEO-to-employee pay ratio is higher for female CEOs than male CEOs in both univariate and multivariate analysis. Accounting for determinants of CEO and employee pay (industry, CEO tenure, firm size and performance etc) it was found that female CEO ratios are still 22-28% higher than that of male CEOs.


For robustness, a matched sample analysis was also conducted, in which each female CEO in our sample was matched to a male CEO in the same industry, with the closest firm size. This analysis showed a highly significant difference in pay ratio, ranging from 146.5 to 199.3, depending on industry definition. The difference in conditional ratios between minority and majority CEOs ranged from an 8% premium to a 7% penalty for minorities but were statistically insignificant.


The higher CEO-to-employee ratios for female CEOs can be interpreted in a number of ways.


First, and most obvious is that corporations in their desire to fulfil diversity goals, contribute to tighter labour market conditions for female executives, lifting their pay. It is also possible that female CEOs possess superior qualities commanding higher pay, which were not captured by the available controls. On the other end of the ratio, female CEOs could be hired to get companies “out of trouble,” in line with the so-called “glass-cliff hypothesis,” and employee pay could be lower there for obvious reasons.

The results for minority CEOs demonstrate that their ratios are comparable to that of the majority. However, minority female CEOs relative to their white counterparts had smaller ratios. These findings may be reflecting labour market bias or perhaps narrower pay gaps in companies with such CEOs.


While the data did not allow for a precise separation of one explanation from another, the fact that a minority female CEO’s compensation and median employee compensation are both higher for minority CEOs, suggests the latter.


However, the differences are statistically insignificant, possibly due to the small sample size of minority female CEOs, suggesting that successful minority women may also be elevating their base. Minority female CEOs in the sample included Indra Nooyi of Pepsico (who stepped down in 2018), Lisa Su of Advanced Micro Devices, Constance Lau of Hawaiian Electric Industries, Catherine Ngo of Central Pacific Financial, and Jayshree Ullal of Arista Networks.


Growing global exposure, increasing population diversity, and greater participation of women in the labour markets pushes US corporations to seek increasingly diverse top leadership. Overall, the results suggest gender and ethnicity of CEOs matters in determining CEO-to-employee pay ratio.


Read more at ALL ARK LLC


Licensed from https://www.weforum.org/agenda/2021/07/ceo-diversity-does-it-explain-ceo-to-employee-pay-ratio/

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