The perception of the pay ratio

Abstract

In recent years, it has been apparent that more and more investors consider nonmonetary values when constructing their portfolios. Many firms set large wage differentials between workers and managers, with the former sometimes suffering from what is known as behindness aversion. Subsequently, pro-social investors might shun these companies, since they might exhibit income inequality. However, quite low wage differentials might be unfair for the managers and they can also be viewed as low salary growth expectations by employees, insinuating that there might be an optimal wage gap. In four dependent variables employed in this survey I find that the relationship between the pay ratio and institutional ownership is a concave across US listed firms, with the optimal pay ratio being situated at the 35th percentile of the pay ratio distribution.