CEO Pay Ratio Estimation under Social Pressure

We use firms’ discretionary choices in the CEO pay ratio disclosure to examine corporate decisions under social pressure. Reported pay ratios are significantly lower when firms use complex methods to identify the median employee, whose total pay is the denominator in the ratio. Firms choose more complex methods when their headquarters states have more prosocial attitudes toward income inequality, greater union coverage, or have proposed pay-ratio surtaxes. Our results suggest that some firms estimate pay ratios that better align with social norms in response to social pressure without changing pay, which can make disclosure less useful to shareholders and stakeholders