Dodd Frank Act: Reporting CEO Compensation Relationship to Worker Ratio and Firm Performance

Abstract

This study explores the relationship between the firm’s CEO cash-based compensation and equity-based (non-cash) compensation and total CEO compensation to firm performance and the pay ratio with the median employee pay as required by the Dodd Frank Act (2010). The analysis uses information for 200 US publicly traded firms with revenues of $1 billion or more that filed 2018 proxies by April 30, 2019. The study finds a significant relationship of the CEO compensation to the median employee pay and to the pay ratio. The analysis supports past studies that find little, or no, relationship of the CEO compensation with firm financial performance measures including the ROE, ROA, and Tobin Q or the firm’s financial measures including total revenue, total assets or leverage. The study does find the Tobin’s Q that measures the firm’s value is negatively related to the CEO’s cash-based compensation. Given these findings, the firms in this study are paying their CEOs greater amounts without regard to the financial performance of the firm.