Management Accounting Section Midyear Meeting

Seeking Justice: CEO Pay Ratio and Employee Whistleblowing

• In Event: White Collar Crime (Mixed Methods)

Abstract

This study examines the effect of the CEO pay ratio on employee whistleblowing. We expect that a higher CEO pay ratio increases employees’ perceptions of compensation injustice and thus motivates employees to blow the whistle on potential management misconduct. Consistent with this expectation, we find that firms with higher CEO pay ratios are more likely to experience employee whistleblowing of alleged misconduct in the following year. This effect of the CEO pay ratio on whistleblowing is more pronounced for firms with higher CEO compensation and shorter CEO tenure relative to other firms. Further, higher CEO pay ratios increase not only more meritorious but also less meritorious cases. Finally, the whistleblowing incident is followed in the next year by a decrease in the CEO pay ratio and an improvement in financial reporting quality. Overall, our findings suggest that this form of high pay disparity within a firm encourages employees to monitor management through whistleblowing.

Authors

• John H Evans III, University of Pittsburgh

• Mark Ma, University of Pittsburgh