CEO-to-employee pay ratio and CEO diversity

By | February 3, 2021

Concerns about income inequality and supposed CEO rent extraction motivated the enaction of Section 953(b) of Dodd-Frank Act. The SEC issued new rules to implement 953(b) in 2015 and they became effective in 2017.  The rules require public companies to disclose their median employee pay and its ratio to CEO pay. The CEO-to-employee pay ratio increased 1000% in the last 40 years according to Economic Policy Institute, widening the gap between average Americans and the top 1%. 

US corporations are being pushed to improve the diversity of top leadership. As Zweigenhaft and Domhoff note in their 2010 book “The New CEOs”, the number of women, African-American, Latino, and Asian-American CEOs has climbed from 21 to 37 from 2000 to 2008, representing 2% of Fortune 500 firms’ leadership. Our 2017-2018 data for S&P 1500 firms shows that the number of “new” CEOs more than doubled since then, with women now holding 5%, and minority representatives 7%, of the CEO positions. While diverse leadership is sought to mirror the customer base as well as the labor force, it can also potentially address the problem of growing income inequality, which many believe is the product of crises in corporate governance and rapidly growing executive compensation. There is an ongoing academic debate on whether women and minority leaders are underpaid. A smaller, emerging area of empirical research, looks at whether female CEOs affect the compensation of employees. There is little attention paid, thus far, to similar roles played by minority executives. 

Our paperCEO-to-employee pay ratio and CEO diversity, utilizes the newly available data on relative pay of the top executives to their employees, and examines whether the CEO background affects the size of this ratio, potentially moving corporate compensation systems towards greater equity. We hypothesize that female and minority CEOs have differences in values and management styles compared to the white male majority. 

Results indicate that CEO-to-employee pay ratios are 22-28% higher for female CEOs compared to their male counterparts, controlling for other determinants of pay ratios. Consistent with the literature, larger and more profitable firms have higher CEO-to-employee pay ratios. For robustness, we also conducted a matched sample analysis. Each female CEO in our sample was matched to a male CEO in the same industry, with the closest firm size. This analysis showed a highly significant difference, with a pay ratio difference ranging from 146.5 to 199.3 depending on industry definition.  

There is, however, no statistically significant difference between the pay ratios of minority vs. white male CEOs. On the other hand, when we focus only on female CEOs, we see that minority female CEOs have lower CEO-to-employee pay ratios than white female CEOs. These results could either be a sign of bias at the hiring stage, or of closing of the pay gap in companies with such CEOs.  

Our paper is the first to examine the effect of female and minority CEO status on CEO-to-employee pay ratio. The paper demonstrates that gender helps explain CEO-to-employee pay ratio after controlling for firm, industry, and CEO characteristics despite a small sample size of female CEOs. Our research is also one of the first to use the data on CEO-to-employee pay ratio released due to the mandate of the Dodd Frank Act in 2017.  

Hypothesis Development 

The hypothesis we test in this paper is whether firms headed by female and minority CEOs have a higher or lower CEO-to-median-employee compensation ratio. In particular, we consider two opposite hypotheses:  

  • H1. Companies with minority and female CEOs have a lower CEO-to-median-employee pay ratio; 
  • H2. Companies with minority and female CEOs have a higher CEO-to-median-employee pay ratio. 

We suggest that there are at least two explanations to H1. First, female and minority CEOs may hold different attitudes, values, and approaches towards social corporate responsibility in the area of compensation due to their unique life experiences (e.g., Rosener, 1990). They may hold beliefs that a lower pay gap between executives and employees improves employee morale and is associated with better financial performance. Second, female and minority CEOs are less likely to engage in opportunistic behavior and “extract concessions” (Mishel and Wolfe, 2019). To the same effect, racial/gender bias and discrimination may also be associated with lower ratios, with the CEO “being affected”, not “affecting” the ratio (e.g., Bertrand and Hallock, 2010). 

For H2, higher CEO-to-employee pay ratio can be due to higher demand for female and minority executives, either due to corporate “diversity goals” (e.g., Leslie et al., 2017) or their superior performance (e.g., Jalbert et al., 2013), which results in higher CEO pay. Additionally, research suggests that female or minority CEOs can be hired in “glass cliff” or precarious economic conditions (e.g., Glass and Cook, 2019). They are called (and paid) to turn around corporate fortunes, which may entail budget and compensation cuts. Because of the “glass cliff”, the CEO and employee pay diverge. 2019), being called (and paid) to turn around corporate fortunes, which may entail budget and compensation cuts. Because of the “glass cliff”, the CEO and employee pay diverge. 

We acknowledge that our hypotheses are based on factors that determine CEO pay. We explain this hypothesis development by the fact that markets and pay-setting environments differ substantially for CEOs and employees of large public corporations in terms of market competition, pay-setting methods, and structure of compensation packages (see for ex., Rosen, 1981). The CEO compensation is determined in the market for “superstars” and is driven not only by industry-wide characteristics but by their personal qualities and company fit. Meanwhile, employee pay is determined in relatively competitive labor markets, and should not be affecting the ratio once industry controls are in place.  but by their personal qualities and company fit. Meanwhile, employee pay is determined in relatively competitive labor markets, and should not be affecting the ratio once industry controls are in place.   


The data on CEO-to-employee pay ratio has not been available before the passage of the Dodd-Frank Act in 2015. While CEO compensation was released by companies, median employee pay was not. We obtain the data on CEO-to-employee pay ratio from MyLogIQ for 2017-2018 period, who collected that data from SEC filing Schedule 14A. In these forms, many companies also describe how the median employee has been identified. The companies were required to report the CEO-to-employee ratio starting from 2017, which provide us with data for S&P1500 companies for 2017 and 2018 fiscal years. We then matched the data from MyLoqIQ to CRSP/Compustat Merged database to obtain accounting and stock return data, and to ExecuComp and Institutional Shareholder Services (“ISS”) to obtain CEO pay and characteristics. Our main variable of interest, CEO gender, is obtained from ExecuComp. Minority dummy is obtained from ISS. Our final sample is 1910 firm-year observations.  

Empirical Methodology and Findings 

In our dataset, the median CEO pay is $6.4 million, while the median employee pay is $62 thousand. The mean CEO-to-employee pay ratio is 201.6. Out of the 2520 firm-year observations with available data on CEO gender, 134 (5.3%) are female. CEO-to-employee pay ratio for female CEOs is 373.88 compared to 191.98 for male counterparts, with the difference being statistically significant. In our sample, 7% of CEOs are minorities. Their pay ratio is 172.7 and is not statistically different from that of the Caucasian sample. 8% of female CEOs and 7% of male CEOs are a minority. Minority female CEOs have lower pay ratios (207.96) compared to Caucasian female CEOs (391.29), and the difference is statistically significant. At the same time, the former earns more, $12.5 million per year compared with $10.7 million for Caucasian female CEOs.  

However, this difference is not statistically significant, potentially due to the small sample size for minority female CEOs. The average employee compensation is $84 thousand for minority female CEOs and $67 thousand for Caucasian female CEOs. The difference between the logs of employee compensation is statistically significant, while the difference between raw numbers is not statistically significant. We find no difference in industry distribution for different types of CEOs.  

Our main analysis is a regression of CEO-to-employee pay ratio on two key variables – female and minority dummies – while controlling for other determinants of pay ratio found in prior literature. Our controls include the following variables: a dummy for whether the CEO is also a Chairperson of their board, average tenure, firm size, book-to-market, return on assets, Tobin’s Q, and physical capital intensity. We find a positive and significant coefficient on female dummy in all models. We also find that the coefficient on the minority dummy and minority*female dummy interaction is insignificant in all specifications. The results are robust to clustering errors by firm and including industry dummies. Consistent with prior literature, we find a positive coefficient on firm size and a negative coefficient on book-to-market in most models. 

To ensure the robustness of our results, we also conduct a matched sample analysis. Each female CEO in the sample is matched to a male CEO in the same industry group, with the closest firm size. We find that the pay ratio of female CEOs is significantly higher than the pay ratio of male CEOs.  

Next, we turn to further analysis of the female CEO subsample. We find, in both univariate and multivariate analysis, that minority female CEOs have lower CEO-to-employee pay ratios than white female CEOs. This difference is statistically significant despite the small sample size. 

Interpretation of the Results 

Our results indicate that companies led by female CEOs have higher CEO-to-employee pay ratios in both univariate and multivariate analyses. The univariate comparison of means revealed that on average, companies with female CEOs have ratios 95% higher than those with male CEOs. The regression analysis showed that the ratio for women is 22% (controlling for industry fixed effects) to 28% (without industry controls) higher than the comparison group of companies. The effect is reduced in the multivariate analysis because of other factors such as firm performance, size, physical capital, duality of CEO and CEO on-the-job tenure.  

While we expected the CEO-to-employee pay ratios to be smaller in companies with female and minority CEOs, there are several factors that may currently contribute to the opposite. The most important factor is the rapidly growing demand for diversity, which makes the labor market for women and minority executives rather tight. This is supported by data that show that women are overrepresented at the top end of the pay and ratio distributions, and only a gfew female CEOs are hired by medium and smaller size firms in the S&P 1500 list.  

The data also show that women CEOs are more likely to be hired by firms with lower employee pay, which provides support to the “glass cliff” explanation. The “glass cliff” coupled with “differences in values” hypotheses are further substantiated when we examine pay ratios of female CEOs by the minority status (univariate analysis). Female minority CEOs have lower pay ratios and higher employee pay (and slightly higher CEO compensation) than Caucasian CEOs while having 3 more years of on-the-job tenure (8.5 vs 5.5 years). This hints that they may be able to improve employee pay as they turn around their firms’ economic fortunes, reducing the executive–employee pay gap. However, this evidence is relatively weak, due to the very small number of minority female CEOs.  

While we acknowledge the limitations of our inferences due to the short panel of data available after the enactment of the Dodd–Frank mandate, our findings shed new light on the interplay of gender, race, and ethnicity in corporate compensation and overall inequality. As the first to examine the pay ratios in this regard, we are contributing to the existing academic discussion on CEO compensation, employee compensation, and inequality as we outline a new path of research of combined CEO and employee pay and CEO diversity. As new data becomes available with each subsequent year of Dodd-Frank mandate, and as a greater number of “new CEOs” enters the ranks of top corporate executives, we expect our results to solidify. We also look forward to observing the trajectory of change in the ratio for each of the examined groups of CEOs. 


Nazli Sila Alan is an Assistant Professor of Finance at Fairfield University, Katsiaryna Salavei Bardos is an Associate Professor of Finance at Fairfield University, and Natalya Y. Shelkova is an Associate Professor of Economics at Guilford College.  

The post is adapted from their paper “CEO-to-employee pay ratio and CEO diversity” published in Managerial Finance. 

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