CEO Pay Balance and Firm Performance in Times of Socioeconomic Challenges

This paper explores the socioeconomic turmoil during the COVID-19 crisis of 2020-2021, which had a profound global impact. It examines firms' mechanisms to safeguard themselves from risks in such challenging circumstances. Specifically, the paper investigates whether offering higher compensation to CEOs compared to other top executives or average employees can help firms protect or enhance their profitability during these uncertain times. CEO pay balance is defined as CEO pay relative to a company president's, average vice president's, top vice president's, or average employees’ pay. The study focuses on the top 10 most valuable firms on the NASDAQ, covering 2017-2022. For firm performance, the paper focuses on the profitability of each firm. For profitability, three measures are used. These are Return on Assets, Return on Equity, and Profit Margin. Regression analysis is performed to explain each firm's performance using the CEO pay balance and four control variables: size, growth, leverage, and previous profitability value. The results show that none of the four CEO pay balance measures significantly explain the return on equity, assets, or profit margin. The findings suggest that increasing CEO pay relative to the average employee, a firm's president, or the VPs does not translate into improved profitability for these firms. This study does not support the view that paying more to CEOs relative to the company president, the other top executives, or the average employee increases firms' profitability.