An Examination of CEO Pay Transparency on Consumers’ CSR Evaluations: An Abstract

Abstract

In recent years, the US Securities and Exchange Commission (SEC) implemented section 953(b) of the Dodd-Frank Act. Starting in 2018, this act requires public companies in the United States to disclose the ratio of CEO pay compensation relative to the median compensation of its’ employees. The resulting increase in transparency surrounding CEO pay has allowed the American public to form perceptions about companies and the amount of compensation their CEOs receive. Absent from the emerging stream of research on consumers’ evaluation of CEO compensation is the potential for CEO pay to influence CSR perceptions. In this research, we propose CEO pay ratio as a novel driver of consumers’ CSR evaluations. Despite the seemingly unrelated nature of CEO pay and a firm’s CSR reputation, we find evidence in a pilot study (n = 105) using Fortune 500 CEO pay ratio data as the stimulus, that firms with a high CEO pay ratio lead to lower CSR evaluations relative to organizations with a low CEO pay ratio. In a follow-up study, participants were recruited using Facebook advertisements (n = 196). Once again, a significantly higher proportion of respondents deemed firms led by CEO’s with a lower (versus higher) pay ratio to be more socially responsible. Finally, in our third study (n = 101), we examine the process through which CEO pay ratio influences consumers’ CSR evaluations. In support of our proposed model, we find that CEO pay impacts CSR evaluations through serial mediation, whereby higher CEO pay diminishes consumers attitude toward the firm which in turn leads to more firm-serving motivations and ultimately, lower CSR evaluations. For managers, the increase in transparency following the passing of the Dodd-Frank act likely introduces uncertainty about how consumers evaluate their company’s compensation structure. By exploring the intersection between CEO pay and corporate social responsibility, we shed light on the potential for consumers to employ CEO pay as a diagnostic cue when assessing the organization’s CSR reputation.