Strategic Pay Ratio Estimation under Social Pressure

We examine firm decisions under social pressure by focusing on firms’ discretionary choices in estimating the CEO pay ratio. Reported pay ratios are significantly lower when firms use complex methods to identify the median employee, whose total pay is the denominator in the ratio. Firms choose more complex methods when their headquarter states have more prosocial attitudes toward income inequality, greater union coverage, and have proposed pay-ratio surtaxes. Our results suggest that a prosocial culture toward income inequality influences real firm decisions, and some firms strategically estimate pay ratios that better align with social norms without making changes to pay.