September 16, 2020
CEO Pay Ratio – Cost of Capital Connection
– Lynn Jokela
With heightened scrutiny on executive pay and pay equity, a study by researchers at the University of Michigan, Simon Fraser University and The World Bank Research Group examines CEO pay ratio data and indicates that as a company’s CEO pay ratio increases so does the cost of capital. The study was released in 2019 and advocates for continued disclosure of CEO pay ratio data – but, a more recent University of Michigan news release touts the pay ratio – cost of capital connection. Here’s an excerpt from the news release:
The researchers wanted to know if more powerful CEOs actually harm their companies. They used publicly reported pay ratios to measure CEO power, and they chose cost of capital as an indicator of potential harm to companies. Quoting one of the authors, a professor of finance at Michigan, it says ‘If the firm is doing things that are inefficient, that are not in the best interest of the shareholders, that would be reflected in the cost of capital. We found that holding all else constant, as CEO power increases, it’s costing the shareholders more money.’