We examine how the cross-national variability in pay ratios between the CEO and average workers in the same firm are related to differences in both culture and societal equity orientation, after controlling for country institutions and firm-specific variables used in existing work on executive compensations. Guiso, Sapienza, and Zingales, (2006, 2009) argue that the national culture has a significant effect on economic outcomes by influencing the preferences and beliefs of individuals and their economic decision-making.
We formulate two sets of hypotheses: one on culture, and the other on societal equity orientation. We predict that the relative pay ratios are associated with the degree of income or wealth inequality. We use large firm-level global panel data for 44 countries obtained from Compustat North America, Compustat Global, and Capital IQ for 2002-2015. For the CEO-worker pay ratio, we use the natural logarithm of the ratio of CEO compensation to average employee pay, measured by the total staff expense per employee. To address the sample selection bias due to non-random disclosure of staff expense or the number of employees, we use the Heckman selection model.
We find that both the culture and the societal equity environment are important as determinants of the CEO-worker pay ratios, after controlling for firm-specific variables. Specifically, the tests uncover that the CEO-worker pay ratios are positively associated with power distance, individualism, and masculinity, and negatively associated with uncertainty avoidance and long-term orientation, regardless of whether Hofstede’s cultural measures or Globe’s scores are used. We also find that the pay ratios are higher in countries with high income or wealth inequity. Finally, we reiterate that the pay ratio increases with the decrease in efficacy of corporate governance as measured by CEO-chair duality and other board characteristics using global data.