The Pay Ratio Disclosure Rule and Stakeholder Pressures May Give Way to Lower CEO Compensation: A Literary Approach

The beginning of the 21st century rocked financial markets with a series of catastrophic corporate scandals and financial meltdowns. First came the wave of corporate governance failures of Enron, Adelphia, WorldCom and Tyco only to be followed, not even a decade later, by the massive credit crisis that caused the bankruptcies of Lehman Brothers and Washington Mutual Bank. These financial meltdowns were caused in part by poor management oversight, a failure of corporate governance and self-interested CEO’s who were more focused on their massive paychecks and bonuses than on protecting shareholder value. Each crisis caused a reactionary movement towards restructuring corporate governance and policy to satiate growing stakeholder pressures to reform the system. The Sarbanes Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act were intended to transform the rules and close any loopholes in order to prevent such economic atrocities from happening ever again. The Dodd-Frank Wall Street Reform and Consumer Protection Act included a particular disclosure – the Pay Ratio Disclosure Rule – that mandated publicly traded companies to produce executive compensation specifics starting in their 2018 filings. The ratio is essentially the median of the annual total compensation of all the company’s employees, except the CEO, divided by the CEO’s total annual compensation. This paper assesses the new rule’s potential impact on CEO compensation through an empirical literary review on Corporate Social Responsibility, stakeholder theory, equity theory, stewardship theory, agency theory and organization theory