Investors who dislike income inequality are moving their money away from companies with high ratios of CEO-to-worker pay, according to first-of-its-kind research a University of Minnesota professor co-authored.

Tracy Yue Wang, a finance professor at the U's Carlson School of Management, said public companies need to pay attention to this newly revealed pattern that shows inequality-averse investors, including institutional investors, actively rebalance their portfolios to invest in the stocks of firms with low pay disparities.

That sends a "powerful valuation signal to companies" with high pay ratios, whose values, on average, tend to decline after those ratios become public, Wang said.

That could lead to changes in corporate culture and policies that curb pay disparities, she and her co-authors assert. Or investors could directly pressure firms to advance pay equity through voting or governance mechanisms. Investors and capital markets could address income inequality as an alternative to, or in combination with, political measures.

Tracy Yue Wang is a finance professor at the University of Minnesota’s Carlson School of Management.
Tracy Yue Wang is a finance professor at the University of Minnesota’s Carlson School of Management.

Carlson School of Management

"Our study suggests that investors send a message to firms that, 'We care about income inequality. We dislike large pay dispersion in your company,'" Wang said. "If firms care about investors' reactions, if they care about potentially their cost of capital, they would actually do something to address it, especially if money is flowing out of firms with high dispersion and into firms with low dispersion."

While companies have long had to report CEO compensation, public companies now must disclose CEO-to-worker pay ratios under a Securities and Exchange Commission rule that took effect in 2018.

The new pay-ratio disclosure rule allows investors and other stakeholders to compare for the first time CEO compensation to median worker compensation and assess, at least partly, income differences within a firm. Wang and her co-authors — Yihui Pan of the University of Utah, Elena Pikulina of the University of British Columbia and Stephan Siegel of the University of Washington — analyzed investor reactions to those 2018 pay ratios in a paper published in the Journal of Finance.

Negative responses to high pay ratios from inequality-averse employees, customers and local governments could reduce those firms' future cash flows, Wang and her co-authors found. Firms with high pay ratios could lose investors, which could depress their equity prices and increase the cost of capital.

One unexpected result was that a significant share of investors care about high pay ratios, Wang said.

"The common view before our study came out was that there are people that are inequality-averse but not necessarily financial investors," Wang said. "That's why our finding is interesting and also a little bit surprising, in the sense that we identify a group of investors that seem to dislike income inequality, and their presence is substantial enough to have a price pressure [on firms' stocks]."

CEOs earned 399 times as much as a typical worker in 2021, the Economic Policy Institute reported in October.

"Exorbitant CEO pay is a contributor to rising inequality that we could restrain without doing any damage to the wider economy," the institute stated, adding CEO compensation has "skyrocketed" 1,460% from 1978 to 2021.

In Minnesota, famously ranked No. 1 in Fortune 500 companies per capita, 399-to-1 was exactly last year's pay ratio for Best Buy CEO Corie Barry, according to the Star Tribune. At Ameriprise Financial, the ratio for CEO James Cracchiolo was 183-to-1. For Target CEO Brian Cornell, it was 680-to-1.

Walmart has garnered attention for its high pay ratio, recently reported at 933-to-1. Wang said that, in part, reflects the company's largely part-time workforce.

CEO pay matters, Wang said, because other academic research suggests at least one-third of income inequality is a result of pay disparities within corporations, particularly big, publicly traded ones. This reflects, according to the Organization for Economic Cooperation and Development, the power that firms have to set wages independently from competitors. It also shows that worker skills do not exclusively determine wages.

Income inequality in the United States has been rising, according to a study this month from the Federal Reserve Bank of Minnesota. Since 1980, the top 10% of the population has enjoyed 145% real income growth, while the bottom 50% has seen only 20% growth.

Higher levels of income inequality reduce economic growth because they decrease household spending and limit educational opportunities for the children of those who are less well-off, according to some research. "The unequal distribution of income constrains how much the pie grows for everyone," a Fed article stated.

Less inequality-averse investors, however, think large pay ratios mean having a CEO who is highly capable or productive, Wang said.

"I'm not saying that we should have no pay dispersion," Wang said. "Pay dispersion happens for many reasons. But if the corporate leadership could be more thoughtful about this dimension of incentive structure, I think that they can get good outcomes, not only from within with their employees and so on, but also from their shareholders."

Todd Nelson is a freelance writer in Lake Elmo. His e-mail is