Societal equality sentiment and executive compensation

Official URL: https://dx.doi.org/10.1016/j.jcorpfin.2022.102314

Using elections that reveal changes in countries' leniency on the left-right political spectrum, we examine whether societal sentiment regarding income inequality affects executive compensation. We find that elections that bring left-leaning (pro-equality) political leaders to power are associated with significantly lower CEO pay and this impact begins in the year of such elections, not before. We further show that a rise in pro-equality sentiment restrains powerful CEOs from extracting rents. However, such sentiment also imposes value-damaging limits on incentives of senior executives in a given firm or industry. Our results are robust to a host of alternative measures and specifications.