Incentive Rebalancing and M&A Decisions After Pay Ratio Reporting

In 2015, the U.S. Securities and Exchange Commission (SEC) introduced a controversial new rule requiring publicly traded companies to disclose the ratio of their CEO’s pay to that of their median employee. The goal? Greater transparency—and, perhaps, a little public shaming for firms paying their top executives hundreds of times more than their average worker. Critics argued the rule was political theater. Supporters hoped it would curb excessive CEO pay. But what actually happened? In our new study, CEO Incentives and Acquisitions: Evidence from the Pay Ratio Disclosure Mandate, we uncover something unexpected: the rule didn’t just change how much CEOs got paid—it changed how they made decisions, particularly when it came to mergers and acquisitions (M&A). Here’s what we found and why it matters. 

The Pay Ratio Disclosure Mandate: A Quick Recap 

Before 2018, companies weren’t required to disclose how much their CEO made relative to their employees. The Dodd-Frank Act changed that, forcing firms to report their CEO-to-worker pay ratios starting in 2017.

Unsurprisingly, some firms had eye-popping ratios. While the median pay ratio in our sample was 87:1 (meaning the CEO made 87 times the median employee), some firms had ratios as high as 5,908. 

These disclosures didn’t go unnoticed. High-ratio firms faced backlash—negative media coverage, investor scrutiny, and even employee unrest. Suddenly, paying the CEO like a superstar while workers struggled looked like a reputational liability. 

But did this scrutiny actually change anything beyond optics? 

How the Mandate Changed CEO Pay 

We started by examining whether high pay-ratio firms (those with pay ratios above the sample median) adjusted CEO compensation after the rule took effect. The answer? Yes. 

Bonuses and stock awards took the biggest hit. High-ratio firms reined in incentive pay (cash bonuses and equity grants), which are the most visible—and controversial—parts of CEO compensation. Salaries saw only minor adjustments. 

Pay became less sensitive to firm size. Before the mandate, CEOs got big raises when their companies grew. After the rule, that link weakened CEOs of high-ratio firms saw 60% less pay growth from expanding their companies. 

“Upside” pay-for-performance weakened. CEOs of high-ratio firms still got penalized for poor performance, but they no longer reaped the same rewards for strong results. However, “downside” pay-performance sensitivity did not change, meaning the CEOs were penalized to the same extent for destroying firm value. 

In short, public scrutiny made boards hesitant to hand out big pay hikes especially those tied to growth.

The Surprising Impact on M&A 

Here’s where things get interesting. If CEOs are no longer rewarded as much for growing their firms, do they still pursue big, empire-building acquisitions? 

Our answer: No, at least, not in the same way. 

Before the mandate, CEOs had strong incentives to chase large deals, even if those deals weren’t great for shareholders. Bigger companies meant bigger paychecks. But when pay became less tied to size, their behavior shifted: 

Change in deal composition. Fewer large deals, more small deals. High-ratio firms did fewer large acquisitions relative to smaller ones post-mandate. 

Change in deal performance. Large deals got better; small deals got worse. The remaining large deals were higher quality (as measured by market reactions), while small deals underperformed. 

Why? We argue it’s about screening effort. 

The Screening Shift: A Simple Model 

Imagine a CEO has two types of deals on the table: 

1. Large deals – High stakes, but require more effort to evaluate. 

2. Small deals – Lower stakes, easier to assess.

Before the mandate, CEOs had little reason to scrutinize large deals carefully—even a bad one could boost their pay by increasing firm size. So they rubber-stamped big acquisitions and focused their effort on screening small ones.

After the mandate, the payoff for size shrank. Now, CEOs had more reason to carefully vet large deals since a bad one could hurt performance and their paycheck. But screening is costly, so they shifted effort away from small deals.

Result: 

- More rejected large deals → only the good ones went through. 

- Less scrutiny on small deals → more bad ones slipped through. 

What This Means for Investors and Policymakers 

Our findings suggest that the pay ratio rule had real if unintended consequences: 

1. It curbed empire-building. Fewer CEOs pursued large, value-destructive acquisitions just to inflate their pay. 

2. But it created a new problem. With CEOs focusing on big deals, small acquisitions got less attention and suffered in quality. 

For investors, this is a mixed bag. On one hand, large deals became better. On the other, small deals got riskier. However, our results suggest that by inducing better screening for large deals, the mandate helps curb empire-building, safeguarding shareholders from the costly burden of underperforming mega-assets that could stifle future growth. For policymakers, the lesson is nuanced. Disclosure rules can change behavior, but not always in straightforward ways. The pay ratio mandate didn’t just tweak compensation it altered how CEOs allocate their time and effort. 

The Bigger Picture: Are CEOs Really Motivated by Pay?

Our study adds to a growing debate: How much do financial incentives really drive CEOs? 

Some argue that CEOs are mostly motivated by non-financial factors—prestige, power, legacy. Others believe pay is the primary lever. 

Our results suggest pay structure matters more than the absolute level. When the rules changed, so did CEO decisions not because they were earning less, but because the way they earned it shifted. 

This has implications for corporate governance. If you want CEOs to focus on value creation, not just growth, tying pay to the “right” metrics is key.

Final Takeaway 

The pay ratio rule wasn’t just about fairness it reshaped CEO incentives in ways that altered corporate strategy. High pay ratios led to public scrutiny, which led to weaker pay-for-size links, which led to fewer (but better) large deals and more (but worse) small ones. 

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Sudipto Dasgupta is a Professor at the Department of Finance at the Chinese University of Hong Kong, a Senior Fellow of CEPR and ABFER, and an ECGI Research Member

Tao Shu is the Fung King Hey Memorial Chair Professor of Finance at the Chinese University of Hong Kong 

Yuxuan Zhu is a PhD student at the Chinese University of Hong Kong

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