Do high CEO pay ratios destroy firm value

The ratio of CEO to average worker compensation (CEO pay ratio) in the U.S. has risen rapidly in recent years. There is an intense debate over whether high CEO pay ratios reflect managerial rent extraction and corporate governance failures, or firms’ ability to secure superior CEO talent, which is in short supply. To shed light on this debate, this study examines the relationship between CEO pay ratio and firm value/performance. We find that industry-adjusted CEO pay ratios are positively associated with both firm value and performance. In addition, firms with high CEO pay ratios are more likely to engage in value-enhancing acquisitions and exhibit stronger CEO turnover-performance sensitivity. Together, our results suggest that on average, high CEO pay ratios indicate firms’ success in securing scarce CEO talent, not a failure in corporate governance.