CESR is proud to celebrate research excellence from Leeds faculty in our three focus areas of Business Solutions to Environmental Challenges, Diversity, Equity, and Inclusion, and Ethical Leadership. One way we do this is through our annual research awards and grants.
This year, CESR鈥檚 Best Paper Award was shared between two papers that both considered executive compensation:
We sat down with Bryce Schonberger, assistant professor of accounting at Leeds, to discuss this paper鈥檚 findings on the impact of a recent SEC rule requiring firms to disclose the ratio between the CEO and median employee pay and effective ways to address pay inequality. This interview has been lightly edited for length and clarity.
CESR: How would you broadly describe your research? What big questions are you trying to answer?
BS: One stream of my research, which includes this paper, looks at how firms鈥� disclosure requirements change their real decisions or their behavior. Traditionally, accounting researchers would look at what events happened for the firm and how this impacted their reporting. However, research shows that changing what firms are required to report changes their behavior.
CESR: Could you please share a little bit about your research on the pay ratio disclosure mandate in CEO compensation? What inspired you to look into this topic, and what did you discover?
BS: Regulators forced this disclosure in the hopes of reducing pay inequality. The proposal for the CEO pay ratio disclosure is one of the most actively commented on rules the SEC has ever proposed with 287,000 comments. It was divisive. Proponents said it would give information to investors and a useful benchmark about the value that a CEO creates and prompt useful changes in CEO pay. Detractors said that it doesn鈥檛 make much sense to require this disclosure. It doesn鈥檛 have any benefit, it just names and shames CEOs and stimulates adverse media coverage. Our interest in it was just that this debate was one we thought we could shed some light on. There were some nice features of the setting that allowed us to design the test in a way that we could isolate the causal effects of the pay ratio disclosure.
The headline result is that the firms that were required to report the pay ratio did not have any significant change in the level of CEO pay. The whole focus around the adoption of the rule was curtailing excess CEO compensation, but we didn鈥檛 see that the level of CEO compensation changed. We did see a significant reduction in pay for performance at firms subject to the CEO ratio disclosure. We suspect this is an unintended consequence. If anything, the rule should have required CEO compensation to be more tied to firm performance, as this would be more informative for investors. To the extent that CEOs dislike the rule and want to avoid negative coverage, this reduction in pay for performance makes sense because it reduces the risk in the amount of CEO pay.
We also find that there is negative media coverage of the firms that disclose a high ratio, but it鈥檚 not enough to discourage firms from offering excessive pay.
"...requiring these relatively simple measures of within-firm pay inequality are not enough to effect meaningful change to the executive compensation structure."
- says听Bryce Schonberger
CESR: What are the implications of your findings?
BS: The implications are that requiring these relatively simple measures of within-firm pay inequality are not enough to effect meaningful change to the executive compensation structure. This makes sense because there is already so much information in the proxy statement on CEO compensation. The only new information is the median employee pay under the new disclosure requirement. There isn鈥檛 much new information here that can move the needle on the way that firms pay their CEOs.
I do think there are other mechanisms that seem more effective in changing rank and file worker pay and therefore impacting pay inequality. This includes requiring the disclosure of salary ranges in job postings and the increasing tendency of workers to voluntarily provide information on their own pay, on websites like Glassdoor. There鈥檚 starting to be much more disaggregated information on worker pay, which historically has not been the case. We already know a lot about CEO pay, so in pursuit of reducing income inequality, these new sources of information are probably the better spot to look for those impacts.
There鈥檚 some recent research looking into how Glassdoor reviews impact employee turnover. It鈥檚 certainly an area I want to do more work in.
CESR: Do you have thoughts on effective ways of decreasing pay inequality in organizations and controlling excessive executive compensation?
BS: Investors do have a lot of information regarding executive compensation in the C-suite. Research on say on pay votes has shown that these are effective on the margin in reducing CEO pay and aligning executive pay more closely with firm performance. Providing marginally more information on the process at the C-suite level is probably not going to change things a whole lot. Increasing access to information by workers has the potential for making a bigger impact. There鈥檚 also always the potential for regulatory changes, such as requirements to post salary ranges or changes to tax laws, that would have a major impact. Simply requiring more disclosures regarding executive compensation isn鈥檛 something I see as having a huge impact going forward.
CESR: Tell us about the significance of the opportunity to be recognized for doing research related to CESR鈥檚 focus areas.
BS: I was really honored to receive the award. For a number of years, I鈥檝e been active on nonprofit boards. On the research side, it鈥檚 hard to focus on sustainability-related topics because you must go where data is available, where you are able to conduct research and draw inferences. Recognizing papers that are done in these areas is great. I enjoy having this award on my CV; it鈥檚 a nice conversation starter with nonprofits for future work.
The most important things for driving more research on ESG and sustainability would be having more data on environmental performance, including related to the new SEC climate disclosure rules coming online, plus human capital disclosures and risks. The more information that companies are required to disclose and that鈥檚 available from crowd-sourced platforms is going to encourage more work in these areas, which is fantastic.
"I do think there are other mechanisms that seem more effective in changing rank and file worker pay and therefore impacting pay inequality. This includes requiring the disclosure of salary ranges in job postings and the increasing tendency of workers to voluntarily provide information on their own pay, on websites like Glassdoor."
- says听Bryce Schonberger
CESR: What are some big trends you鈥檙e seeing in your research that relate to ESG and sustainability?
BS: Lots more ESG research is taking place in accounting. We have faculty doing work on executive compensation and governance issues, which is the more traditional ESG-type research. Faculty are also doing research on environmental and social performance, which is the newer piece of ESG research. It鈥檚 going to be an ongoing and growing area of research in accounting, particularly as firms start to think about social and environmental bottom lines for the company and how to measure the factors that contribute to these bottom lines.
CESR: How do sustainability and ESG come into your teaching?
BS: I have to prepare students for the CPA exam, so there鈥檚 a core curriculum that has to be covered. While I鈥檓 not able to cover as much sustainability as I might like, I bring in examples wherever I can. One of the nonprofits I鈥檓 involved with (called ) installs solar arrays in low-income communities. I discuss this work with my students to help them understand it as an investment opportunity.
Learn more about our Best Paper Co-Winner Tony Kong鈥檚 research and teaching in this interview from last year.
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