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CEO-employee pay ratio and labor investment efficiency

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  • Li, Yulin
  • Cheong, Chee Seng
  • Canil, Jean

Abstract

This paper investigates the impact of CEO-to-median employee pay ratios on labor investment efficiency. Drawing on competing predictions from Talent Assignment Theory and Equity Theory, we examine how pay disparity between CEOs and average workers influences suboptimal investment in labor (labeled inefficient investment in labor). Our analysis finds a significant negative relationship between pay ratios and inefficient investment in labor, suggesting firms with higher CEO compensation exhibit more balanced labor investments. This challenges Equity Theory, which hypothesizes that large intra-firm pay gaps cause perceived unfairness and under-investment in labor. Overall, the study provides novel evidence on how CEO pay practices shape employee behaviors and factor inputs. The findings contribute to ongoing debates regarding the economic implications of CEO compensation, particularly in optimizing human capital efficiency.

Suggested Citation

  • Li, Yulin & Cheong, Chee Seng & Canil, Jean, 2024. "CEO-employee pay ratio and labor investment efficiency," Finance Research Letters, Elsevier, vol. 67(PA).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324007918
    DOI: 10.1016/j.frl.2024.105761
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    References listed on IDEAS

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