CEO-to-worker Pay Disparity and Cost of Debt: Excessive CEO Compensation or Effective Labor Cost Management?

• In Event: Executive Compensation

Abstract

The purpose of this study is to investigate the impact of CEO-to-worker pay disparity on creditors’ risk assessments. Excessive CEO compensation and effective labor cost management are two causes of large CEO-to-worker pay disparity. The former suggests increased credit investment risks while the later reduces the risks of default. My research indicates larger CEO-to-worker pay disparity is associated with a lower cost of debt. Further analyses reveal this association is stronger for labor-intensive firms than for capital-intensive firms. These results are consistent with CEO-to-worker pay disparity reflecting the effectiveness of labor cost management. This is distinctly different from prior studies examining pay disparity within top executive teams which find larger pay disparity within top executive teams identifies increased investment risks and thus are related to a higher cost of debt. My research also finds the negative relationship between CEO-to-worker pay disparity and the cost of debt is less pronounced when excessive CEO compensation increases. This suggests creditors can distinguish between the two potential causes of larger CEO-to-worker pay disparity (i.e., excessive CEO compensation and effective labor cost management) and adjust required yields accordingly.

Author

• Lijun Lei, Virginia Tech University