CEOs to the Pillory: Punishment Reactions to CEO Pay Ratios

Increased CEO compensation has given rise to a wave of public criticism and new legislation, such as the latest CEO pay ratio rule in the US. Although understanding stakeholders’ reactions to corporate behavior has never been so important, relatively little is known about what influences their punishment reactions. Using a two- level, two-factor experimental design, this study examined whether CEO pay fairness and company performance influence punishment reactions. We found systematic differences in the outcome levels of the four treatments groups. Our results suggest that an effective punitive reaction occurs when corporations display what are perceived to be unfair and undeserved compensation policies. We contribute to the existing literature by integrating equity theory and deservingness theory, and shed light on the impact that apparently unfair and undeserved CEO compensation can have on individuals’ reactions and corporate operations. Our findings have both theoretical and practical implications, as corporate disclosure is increasingly common and likely to influence a wide range of stakeholder reactions, including punishment reactions that can damage both a firm’s reputation and its financial stability."