Companies do better when CEO pay dwarfs average worker, study finds

A paper is to be presented at the American Accounting Association annual meeting on research conducted by Dean of the SMU School of Accountancy and Lee Kong Chian Chair Professor of Accounting Cheng Qiang together with Tharindra Ranasinghe of the University of Maryland, and Sha Zhao of Oakland University. The paper finds that the higher the gap is between CEO pay and that of the median worker, the better the company performance. The researchers examined CEO pay ratios for 817 firms, whose CEOs had an average annual compensation of $7.8 million and whose workers’ mean pay was about $74,000. “Our results are consistent with the argument that firms with high CEO pay ratios are likely to be managed by more capable CEOs,” the paper says. Importantly, the researchers say the higher pay doesn’t cause the better performance. But the higher pay may reflect the search for better-performing CEOs who do lift company performance. “The results are consistent with the argument that high CEO pay ratios are an outcome of market competition for scarce CEO talent,” they said.