The growing gap between CEO compensation and typical worker pay has become one of the most visible signs of rising economic inequality. In the United States, this gap has widened dramatically over the past several decades. While CEOs in the 1960s earned about 20 times more than the median pay of their employees, they earn hundreds of times more now, drawing criticism from investors, employees, policymakers, and the public.

In response to these concerns, the SEC adopted a rule in 2015 requiring public companies to disclose the ratio of CEO compensation to median employee pay. The rule aimed to increase transparency and allow stakeholders to more easily evaluate internal pay equity. Supporters hoped the disclosure would pressure firms to narrow gaps, while critics argued the rule was largely symbolic and potentially misleading.

In a new paper, we examine how companies responded to the mandate. Did they make meaningful changes to their pay structures? Or did the rule simply add another line in the proxy statement?

We find that the rule had more bite than many expected. Even before the first official disclosures appeared in proxy statements, companies began adjusting their pay ratios in anticipation of the rule’s public spotlight. This suggests that reputational concerns were the primary driver of behavior. Firms acted not because they had to, but because they knew their numbers were about to become public.

Importantly, these adjustments did not occur uniformly. The response was strongest among companies that were more exposed to reputational risk. Consumer-facing firms – those that sell directly to the public – were especially responsive, likely because they feared customer backlash or damage to their brands. Likewise, firms led by younger CEOs showed greater responsiveness, consistent with the idea that executives with longer future careers are more sensitive to public scrutiny and motivated to avoid being linked to perceptions of inequality.

These patterns point to an important conclusion: Disclosure rules can shape corporate behavior through capital market pressures even when they don’t dictate specific outcomes. By making information public, they activate reputational channels and social norms. Firms that care about their standing with customers, investors, or employees have incentives to adjust in ways that align with those audiences’ expectations.

At the same time, our findings offer a cautionary note. While firms did respond, the nature of those responses is not always clear. Some companies may have restructured pay in substantive ways such as by limiting CEO bonuses or increasing worker compensation. But others may have relied on cosmetic adjustments to improve their reported ratios, without necessarily reducing inequality in a meaningful sense. This underscores the limits of disclosure: Transparency can change behavior, but it does not guarantee progress on the underlying issue.

Our study also speaks to broader debates around ESG reporting and the role of transparency in addressing social challenges. As regulators consider expanding disclosure mandates around issues like climate risk, diversity, and human capital, our findings suggest that public transparency – when paired with reputational exposure – can be powerful. However, its effectiveness depends on who’s watching and whether firms feel the pressure to respond.

The pay ratio mandate demonstrates both the promise and complexity of using disclosure to address inequality. It offers a clear case where firms acted in advance of regulation, not because they were required to, but because they anticipated how the public would perceive them. In doing so, it highlights how corporate behavior can be shaped not just by law or economics, but by the fear of appearing unfair in the eyes of stakeholders.

This post comes to us from Chase Potter and Zhonghua Zhang at Washington State University. It is based on their recent article, “Bridging the Ceo-Worker Pay Gap: Evidence from the Pay Ratio Mandate,” available here.