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a Manning School of Business, 1 University Avenue, University of Massachusetts Lowell, Lowell, MA 01854, Tel:
+1.978.934.2831, email: [email protected].
b Corresponding author. Tel: +1.978.934.2520, email: [email protected].
c Tel: +1.978.934.2403, email: [email protected].
Corporate Social Responsibility and CEO Compensation Structure
Khondkar Karima
Manning School of Business, University of Massachusetts Lowell
Eunju Leeb
Manning School of Business, University of Massachusetts Lowell
Sanghyun Suhc
Manning School of Business, University of Massachusetts Lowell
June 2015
Abstract
We examine how a firm's corporate social responsibility (CSR) performance affects the structure
of CEO compensation. Traditional agency theory suggests that CEOs actively engage in CSR for
their own interests at the expense of shareholders, and our finding of a positive association
between a firm's CSR performance and CEO total compensation seems to support this argument.
However, a more detailed investigation reveals that the proportion of equity-based compensation
is relatively high for socially responsible firms, whereas the proportion of cash-based
compensation is relatively low. This suggests that a firm's social performance improves the CEO
compensation structure in a way to motivate managers to maximize shareholders' values in the
long run. The positive association between CSR and the proportion of equity-based
compensation is more pronounced in certain CSR categories such as employee relations, and the
main results are driven by the post-SOX period. Overall, our results highlight the positive impact
of CSR performance on the design of the CEO compensation package.
Keywords: Corporate Social Responsibility (CSR), CEO compensation, CEO compensation structure,
equity-based compensation, cash-based compensation
Corporate Social Responsibility and CEO Compensation Structure
Abstract
We examine how a firm's corporate social responsibility (CSR) performance affects the structure
of CEO compensation. Traditional agency theory suggests that CEOs actively engage in CSR for
their own interests at the expense of shareholders, and our finding of a positive association
between a firm's CSR performance and CEO total compensation seems to support this argument.
However, a more detailed investigation reveals that the proportion of equity-based compensation
is relatively high for socially responsible firms, whereas the proportion of cash-based
compensation is relatively low. This suggests that a firm's social performance improves the CEO
compensation structure in a way to motivate managers to maximize shareholders' values in the
long run. The positive association between CSR and the proportion of equity-based
compensation is more pronounced in certain CSR categories such as employee relations, and the
main results are driven by the post-SOX period. Overall, our results highlight the positive impact
of CSR performance on the design of the CEO compensation package.
1
1. Introduction
Prior literature shows that corporate social responsibility (CSR) has great impact on various
aspects of accounting and finance. These studies show that a firm's CSR activity improves
operating and financial performance (McGuire et al. 1988; Waddock and Graves 1997; Hillman
and Keim 2001; Jiao 2010), reduces the cost of capital (Sharfman and Fernando 2008; El Ghoul
et al. 2011), and increases stock price (Shane and Spicer 1983; Hamilton 1995; Karpoff et al.
2005). It is also found that firms engaging in CSR are less likely to manage their earnings (Kim
et al. 2012). On the other hand, a few studies do not find evidence on the effect of CSR on firm
performance. Nelling and Webb (2009) find no evidence of the positive impact of CSR on firms'
performance, and Brammer et al. (2006) show that socially responsible firms tend to have lower
returns.
The effect of CSR activity has also been investigated in the field of corporate governance. Some
recent studies examine the association between CSR performance and CEO compensation, and
this issue has been studied in two ways. One strand of this literature investigates the impact of
CEO compensation on CSR. These studies examine if executive incentives play an important
role in firms' engagement in CSR activity, and they find mixed evidence. McGuire et al. (2003)
find that high levels of CEO compensation lead to poor CSR performance. They argue that
performance pressures driven by such incentives make CEOs more focused on short-term targets,
preventing them from engaging in CSR activities.1 Mahoney and Thorn (2006) claim that
executive compensation structure is an important factor in explaining firms' CSR performance,
finding a negative effect of salary on CSR and a positive effect of stock options on CSR.
The other literature examines the impact of CSR on CEO compensation. Classic agency theory
introduced by Jensen and Meckling (1976) argues that CEOs tend to pursue their own interests
rather than to maximize shareholders' value. This supports managers' tendencies to invest in CSR
for the purpose of hiding their wrongdoings such as corporate misconduct (Hemingway and
Maclagan 2004). In the same vein, CSR can be used as a tool for CEOs to increase their own
benefits such as increasing reputation and strengthening bargaining power, leading to
overinvestment in CSR activities (Milbourn 2003; Barnea and Rubin 2010). This story suggests a
1 Agency theory suggests that CEOs may use CSR activities to pursue their own interests. In this respect, the
negative impact of CEO compensation on CSR performance could suggest that highly (poorly) paid CEOs are less
(more) motivated to improve firms' social performance for their own benefits.
2
positive association between CSR and CEO compensation. That is, firms with high CSR
performance are expected to pay high levels of CEO compensation.
On the other hand, CSR can be negatively associated with CEO compensation. CEOs of socially
responsible firms may tend to receive less compensation for various reasons. First, their strong
performance in CSR makes them proud of being "an exemplary CEO" and internally rewarded
by doing the right thing. In this case, CEOs of high CSR firms are willing to trade their financial
benefits for such satisfaction (Potts 2006; Rekker et al. 2014). Second, low levels of CEO
compensation could be the natural consequence of a firm's CSR activity, because socially
responsible firms may reduce the compensation gap between CEOs and other employees to
resolve conflicts between managers and other stakeholders (Cai et al. 2011).
We extend the above studies by investigating the relation between CSR performance and CEO
compensation structure. In particular, we shed light on the effect of a firm's social performance
on the composition of the CEO compensation package. The CEO compensation structure,
measured by the proportions of cash- and equity-based compensation over total compensation in
this study, is a crucial factor in inducing executives to take on riskier investments and pursue
long-term profits in alignment with the interests of shareholders. Given this, the relation between
CSR performance and the components of CEO compensation can be interpreted in several ways.
First, the impact of CSR on the composition of CEO compensation suggests the types of
compensation packages preferred by CEOs who work for firms with different levels of CSR
activities. For instance, if CEOs are entrenched enough to be involved in CSR activities to
pursue their own interests, they may prefer cash-based compensation based on short-term
performance rather than incentive-based compensation. In contrast, if CEOs are willing to
sacrifice their financial compensation for doing the right thing, such confidence may make them
receive more equity-based compensation based on long-run performance. If a negative
association between CSR performance on CEO compensation is led by a firm's effort to improve
its relations with employees and shareholders, low levels of CEO total compensation for socially
responsible firms will be more likely to be driven by a lower proportion of cash-based
compensation. While prior studies primarily focus on interpreting the relation between CSR and
overall levels of CEO compensation from the perspective of agency theory, we consider all the
possibilities of how the relation differs depending on the components of compensation.
3
Second, the association between CSR performance and CEO compensation implies how different
levels of firms' CSR activities affect the board of directors' decision to design the compensation
package. Optimal contracting theory argues that the ideal structure of the CEO compensation
package from the perspective of the board of directors would be the one that motivates CEOs to
align their interests with the interests of firm shareholders (Core and Guay 1999; Fama and
Jensen 1983; Jensen and Meckling 1976; Murphy 1985). In this sense, our results will answer the
research question of whether a firm’s social performance leads to the right mix in the
compensation package to improve firm value or act as an impediment to mitigating the agency
problem.
Third, the relation between CSR and CEOs' cash-based or equity-based compensation provides
insights into its impact on firm value. Even though CSR performance influences CEO
compensation, its impact on firm value may vary depending on the structure of the compensation.
If CEOs strategically use CSR performance for their own interests, as suggested by Barnea and
Rubin (2010), and it leads to increasing cash-based compensation based on short-term
performance targets, agency problems will be amplified, resulting in decreases in firm value. On
the contrary, if the compensation structure becomes more incentive-based with a firm's CSR
activity, increases in CEO compensation with CSR performance will reduce agency problems by
aligning CEO incentives with shareholders' interests and increase firm value in the long run. We
revisit this issue by investigating if CEOs' active engagement in CSR affects the composition of
the compensation package in a way that reduces or increases firm value.
Before we analyze the effect of a firm's CSR performance on CEO compensation structure, we
first examine if firms' disclosure of CSR information affects CEO compensation and its
components. We find that firms releasing their CSR information tend to have higher levels of
CEO total compensation compared to firms without CSR information. This suggests that CSR
disclosure improves the quality of CEOs by motivating CEOs to work harder to earn more
compensation. Meanwhile, this result turns out to be different when we look into the components
of CEO compensation, and, in particular, the proportion of cash-based compensation is lower for
firms with CSR disclosures. The results show that firms' CSR disclosures affect CEO total
compensation and its structure in a way that provides CEOs incentives to pursue shareholders'
interests.
4
When we investigate the association between CSR performance and CEO total compensation,
we find that firms with high CSR performance tend to pay CEOs more in total compared to firms
with low CSR performance. The results seem to be consistent with Jensen and Meckling (1976),
suggesting that CEOs tend to improve firms' social performance to pursue their own interests.
However, further analysis on CSR performance and compensation components shows that such
high levels of total compensation for high CSR firms are mainly composed of equity-based
compensation.
Socially responsible firms tend to have a relatively low proportion of cash-based compensation
and a high proportion of equity-based compensation, while socially irresponsible firms have a
relatively high proportion of cash-based compensation and a low proportion of equity-based
compensation. This provides evidence against CEOs' self-interested behavior of using CSR for
their own interests, because a firm's CSR performance affects the structure of CEO
compensation in the direction of mitigating the agency problem and motivating managers to
maximize shareholders' value. It also shows that, even if high levels of CEO compensation for
socially responsible firms are attributed to CEO entrenchment, changes in the compensation
structure will end up attenuating agency problems.
The results are more or less pronounced depending on certain dimensions of CSR and the
passage of the Sarbanes-Oxley Act of 2002 (SOX). While the negative relation between CSR
and the proportion of cash-based compensation is more pronounced in CSR areas of environment
and human rights, the positive relation between CSR and the proportion of equity-based
compensation is more pronounced in CSR areas of environment, diversity and employee
relations. It is also found that these results are primarily driven by the post-SOX period.
Overall, our results indicate that the boards of directors of high CSR firms are more likely to
design the structure of CEO compensation to align managers' interests with those of shareholders.
These findings are consistent with Haugen and Senbet (1981) and Agrawal and Mandelker
(1987), who argue that equity-based compensation, such as restricted stocks and stock options,
plays an important role in inducing managers to increase shareholders' value and, thus reduces
agency problems.
This is the first study to examine the effect of firms' CSR activities on CEO compensation
structure with a focus on the intensity of each compensation component. While prior studies
investigate on CEO total compensation or the levels of the compensation components, our study
5
on the proportions of cash- and equity-based compensation draws clearer implications on the
impact of CSR on the structure of CEO compensation. In addition, our results imply the
extensive future use of CSR information among stakeholders and investors, because a firm's
CSR performance is not only an indicator of its financial and operating performance but also a
measure of the degree of efficiency of a firm's corporate governance system. Outside investors
can extract information about a firm's corporate governance from its social performance.
The remainder of this paper is organized as follows. Section 2 reviews relevant literature and
explains the hypotheses that will be tested, and Section 3 describes data and methodology. In
Section 4, we discuss our empirical results of the effect of CSR on CEO compensation structure,
and Section 5 addresses additional tests including robustness checks. Finally, Section 6
summarizes and concludes the paper.
2. Related Literature and Hypothesis Development
Our main focus is on how a firm's social performance affects CEO compensation. When it comes
to testing this, we presume that such relation may vary depending on the components of CEO
compensation. Given this conjecture, we analyze three dimensions of CEO compensation: total
compensation, the proportion of cash-based compensation, and the proportion of equity-based
compensation.
The effect of CSR on CEO total compensation is anticipated in two ways. A firm's good
performance in CSR makes CEOs confident about doing the right thing. Thus, CEOs will be
internally rewarded by firms' CSR activities, which leads to relatively low levels of total
compensation (Potts 2006; Rekker et al. 2014). Alternatively, lower levels of CEO compensation
can be interpreted as the product of a firm's attempt to improve its relations with employees.
On the contrary, CEOs may intend to exploit firms' social performance for their own benefits
(Milbourn 2003; Barnea and Rubin 2010). In this case, they will attempt to increase their
reputation and obtain more bargaining power by improving firms' CSR performance. Such
opportunistic behavior will ultimately lead to high levels of CEO total compensation. Given all
these possibilities for the relation between a firm's CSR performance and CEO total
compensation, we propose the following hypothesis:
6
H1. A firm's CSR performance is significantly associated with CEO total compensation.
We also expect that a firm's CSR performance will affect the structure of CEO compensation. A
firm's good CSR performance indicates that the firm is good at harmonizing different interests
among stakeholders and attempts to improve its relation with employees. Given this, socially
responsible firms are likely to have a higher proportion of equity-based compensation structure
than socially irresponsible firms. Linking this with a negative relation between CSR performance
and CEO total compensation, we predict that the negative association between CSR and total
compensation will be driven by decreases in the proportion of cash-based compensation.
In a traditional agency setting, CEOs prefer a less risky compensation structure with greater
cash-based compensation rather than equity compensation based on long-term performance
(Harris and Raviv, 1979; Westphal 1998). If CEOs overinvest in CSR activities to increase their
own benefits and their entrenched behavior leads to high levels of total compensation, the
positive relation between CSR performance and total compensation is expected to be driven by a
relatively high proportion of cash-based compensation compared to the proportion of equity-
based compensation.2
Given these possible effects of firms' social performance on the
components of CEO compensation, we establish the following hypotheses:
H2. A firm's CSR performance is significantly associated with the proportion of cash-based
compensation.
H3. A firm's CSR performance is significantly associated with the proportion of equity-based
compensation.
3. Data and Methodology
3.1. Data description
2 This is somewhat consistent with managerial power theory, which explains the effects of CEO's power on the
setting of their compensation contracts (Bebchuk and Fried, 2003; Bebchuk and Fried 2004; Core, Holthausen and
Larcker 1999; Hartzell and Starks, 2003).
7
We collect annual CSR data from the Kinder, Lydenberg, and Domini Stats database (KLD
STATS) for the period 1998-2012. KLD STATS includes social and environmental performance
of more than 3,000 listed companies, and the database contains the company ID (CUSIP), binary
indicators for strength and concern activities in thirteen CSR categories, and summary counts for
all the areas. The CSR rating criteria consist of strength and concern indicators for seven
qualitative issue areas and six controversial business issue areas. The seven major qualitative
issue areas include community, corporate governance, diversity, employee relations,
environment, human rights, and product, and the six controversial business issues are alcohol,
gambling, firearms, military, nuclear power, and tobacco.3
Using the KLD STATS dataset, we obtain several CSR measures used in our analysis. Our CSR
measures are based on six main categories, community, diversity, employee relations,
environment, human rights, and product.4 We first calculate total strength and total concern
scores separately by adding up strength and concern indicators across the six categories. After
that, we obtain net CSR scores for each data observation by calculating differences between
these total strength and concern scores. The net CSR score for each of the six CSR categories is
also used in the detailed analysis.
We collect CEO compensation data from ExecuComp for our sample period. The database
includes the details of CEO compensation such as salary, bonus, restricted stocks, stock options,
pensions, and other annual compensation. Based on this dataset, we calculate total compensation
as the sum of salary, bonus, total value of restricted stocks and stock options, long-term incentive
payouts, and all other compensation given for the fiscal year. We also calculate cash- and equity-
based compensation, which are the sum of salary and bonus and the sum of restricted stocks and
stock options granted respectively during the fiscal year. Using these level data, we calculate the
proportions of cash- and equity-based compensation, which are key compensation measures of
this study. Following Core et al. (1999), Leone et al. (2006), and Rekker et al. (2014), we control
for total number of directors, percentage of independent directors on board, and several CEO
characteristics, such as CEO ownership, duality, age, and tenure, since these variables possibly
affect CEO compensation and its structure.
3 The details of CSR categories and strength/concern items are described in Appendix 1.
4 We exclude CSR scores on corporate governance in this study, since its definition contains CEO compensation.
8
We obtain financial statements data from COMPUSTAT and stock return data from CRSP.
Utilities and financial companies (SIC codes 4000-4999 and 6000-6999) are excluded from the
sample. A list of the variables and their definitions are reported in more detail in Appendix 2.
3.2. Descriptive statistics
Table 1 reports summary statistics for key variables in the entire sample. Panel A shows the
statistics of the CSR variables. The mean of the total CSR scores (TCSR) is positive (0.23),
which is consistent with Rekker et al. (2014) and Cai et al. (2011). The mean of CSR strength
scores (CSR_S) (1.92) is greater than the mean of CSR concern scores (CSR_C) (1.69). This
shows that firms disclosing their CSR information tend to have relatively good CSR performance.
In terms of each CSR category, the mean of net CSR scores is positive in community (COMM),
environment (ENV), and diversity (DIV), while the mean of net CSR scores is negative in
employee relations (ER), human rights (HR), and product (PROD).
Panels B and C report the statistics of compensation, CEO and firm characteristic variables. The
mean dollar amount of equity-based compensation (EQUITY) ($3.2 million) is much higher than
the mean dollar amount of cash-based compensation (CASH) ($1 million). Consistently, the
mean proportion of equity-based compensation (PEQUITY) (47.97%) is higher than the mean
proportion of cash-based compensation (PCASH) (32.6%). The statistics of the other
compensation and firm characteristic variables, such as board size (BSIZE), CEO ownership
(CEO_OWN), book-to-market (BM), and Tobin's Q (TOBINQ), are in general consistent with
the statistics shown in prior studies (Cai et al. 2011; Rekker et al. 2014).
[Insert Table 1 about here]
Table 2 reports Pearson correlations between CSR and compensation and CEO-specific variables.
The correlation between total CSR score and total compensation is significantly positive (0.17),
and this positive correlation is consistent when we look into levels of cash- and equity-based
compensation. This seems to support that CEOs use CSR activities as a tool for their private
interests. In this case, we predict that CEO entrenchment will also lead to a relatively high
proportion of cash-based compensation compared to the proportion of equity-based
9
compensation. However, an examination on the proportions of the compensation components
leads to conflicting results. While the proportion of cash-based compensation is negatively
correlated with the total CSR score (-0.15), the proportion of equity-based compensation is
positively correlated with the total CSR score (0.15). This suggests that the positive correlation
between CSR performance and total compensation is primarily driven by the association between
CSR and equity-based compensation. That is, although the correlation between CSR and total
compensation seems to highlight CEOs' abuse of CSR activities, the detailed investigation of
CSR performance and compensation structure suggests that socially responsible firms tend to
have a relatively low proportion of cash-based compensation and a high proportion of equity-
based compensation.
Overall, the correlation results suggest that high CSR firms have compensation structures that
minimize CEOs' moral hazards and induce CEOs to maximize shareholders' values. Since these
findings are based on pairwise correlations between CSR and compensation variables in this
section, we analyze the relation between CSR and compensation in more detail using regressions
in Section 4.
[Insert Table 2 about here]
4. Empirical Results
4.1. CSR disclosure and CEO compensation
Prior to our analysis on CSR performance and compensation structure, we examine if a firm's
disclosure of CSR information affects CEO total compensation and the proportions of cash- and
equity-based compensation. The release of firms' CSR information to the public reduces
information asymmetry. This is supported by Verrecchia (2001), who argues that a firm's
disclosure reduces information asymmetry. If this is the case, a firm's disclosure on CSR activity
enhances shareholders' role to monitor CEOs and leads the board of directors to gain more
bargaining power in determining CEO compensation. Therefore, CSR disclosures are expected
to be negatively associated with CEO compensation. In addition, given enhanced power of
10
shareholders and the board of directors driven by a firm's CSR disclosure, we expect that such
negative relation between CSR disclosure and CEO total compensation will be mainly driven by
decreases in the proportion of cash-based compensation based on short-term performance goals.
On the other hand, a firm's disclosure on its CSR activity can lead to an increase in CEO
compensation, since CSR information also reveals the overall quality of CEOs, resulting in
improvement in their quality in the long run. Therefore, such environment induces CEOs to work
harder to earn more compensation and bargaining power. This argument is in line with Hermalin
and Weisbach (2012), who argue that a firm's enhanced disclosure positively influences both
shareholders and CEOs through the corporate governance system, eventually leading to high
levels of CEO compensation. By this logic, a firm's CSR disclosure will lead to an increase in
CEO compensation. With respect to the structure of the compensation, we conjecture that the
positive association between a firm's CSR disclosure and CEO compensation is mainly driven by
increases in the proportion of equity-based compensation, since both shareholders and CEOs
benefit from a reduction in information asymmetry in this case.
In order to test this, we estimate the following regression model using a CSR disclosure indicator
as a predictor variable:
𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽 × 𝐶𝑆𝑅𝐷𝐼𝑆𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (1)
where 𝐶𝑂𝑀𝑃𝑖𝑡 is CEO total compensation ( 𝑇𝐶𝑂𝑀𝑃𝑖𝑡 ), the proportion of cash-based
compensation (𝑃𝐶𝐴𝑆𝐻𝑖𝑡 ), or the proportion of equity-based compensation for firm i in year t
(𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡 ), 𝐶𝑆𝑅𝐷𝐼𝑆𝑖𝑡−1 is a CSR disclosure indicator which is 1 if firm i has CSR scores in
year t-1 and 0 otherwise, and 𝜽 is a vector of lagged control variables including CEO and firm
characteristic variables.5 We run the above regression with year and industry fixed effects. Table
3 reports the regression results. When we use total compensation as a dependent variable, a
coefficient on the CSR disclosure indicator is significantly positive (0.126). This indicates that
firms with the disclosure of CSR information have high levels of CEO total compensation. As 5
The CEO characteristic variables include the logarithm of the number of directors on the board of
directors(𝐵𝑆𝐼𝑍𝐸), the percentage of outside directors on board (𝑃𝐼𝑁𝐷), ownership by CEOs (𝐶𝐸𝑂_𝑂𝑊𝑁), CEO
duality (𝐶𝐸𝑂_𝐷𝑈𝑅) , CEO age (𝐶𝐸𝑂_𝐴𝐺𝐸) , and CEO tenure (𝐶𝐸𝑂_𝑇𝐸𝑁 ). The firm characteristic variables
include the logarithm of sales (𝑆𝐴𝐿𝐸), book-to-market (𝐵𝑀), the return-on-assets ratio (𝑅𝑂𝐴), the Tobin's q ratio
(𝑇𝑂𝐵𝐼𝑁𝑄) , the leverage ratio (𝐿𝐸𝑉) , the liquidity ratio (𝐿𝐼𝑄) , firm age (𝐹𝐴𝐺𝐸) , market beta (𝐵𝐸𝑇𝐴) ,
aggregated returns for 12 months in years t-1 and t-2 (𝑅𝐸𝑇 and 𝐿𝐴𝐺𝑅𝐸𝑇) , and the standard deviation of
aggregated returns over 5 years (𝑆𝑇𝐷𝑅𝐸𝑇). The detailed descriptions are reported in Appendix 2.
11
explained above, it demonstrates that the release of firms' CSR information motivates CEOs to
exert effort and improves their quality. This eventually leads both shareholders and CEOs to
benefit from firms' disclosures on their CSR activities.
[Insert Table 3 about here]
Under this hypothesis, we expect that this positive association will be attributable to a high
proportion of equity-based compensation. In order to test this, we repeat the above regression
using two components of CEO compensation as dependent variables, which are the proportions
of cash- and equity-based compensation. Columns (2) and (3) report the regression results. The
result in Column (2) shows that a coefficient on the CSR disclosure indicator is significantly
negative (-0.085) when we use the proportion of cash-based compensation as a dependent
variable. On the contrary, the coefficient in Column (3) is positive (0.011) in the regression of
the proportion of equity-based compensation, but is not statistically significant.
The results show that the positive association between CSR disclosure and total compensation
does not hold when we examine the relation between CSR disclosure and the compensation
components. Although the proportion of equity-based compensation is not significantly
positively associated with CSR disclosure, the proportion of cash-based compensation
significantly decreases with CSR disclosure. Given that cash-based compensation is based on
short-term profits and its high levels can cause agency problems, our results imply that a firm's
CSR disclosure does not affect its compensation structure in a way that amplifies the agency
problem and reduces firm value.
Overall, our results on a firm's CSR disclosure and CEO compensation highlight the positive
impact of CSR disclosure on CEO compensation and its structure. A firm's disclosure on its CSR
activity is positively correlated with CEO total compensation and is negatively correlated with
cash-based compensation. These results suggest that a closer look into the proportion of each
compensation component can offer insightful implications on the impact of a firm's CSR
disclosure on CEO compensation. In the next section, we further investigate the impact of CSR
performance on CEO compensation and its structure.
4.2. CSR performance and CEO compensation structure
12
We simply considered a firm's CSR disclosure rather than the degree of CSR performance in the
previous section. However, investigating the effect of CSR performance on CEO compensation
could lead to different results. Motivated by this, we examine how a firm's CSR performance is
associated with total levels and each component of CEO compensation in this section.
CSR is a combined measure of a firm's ethical consciousness for the communities and
environment and its relationship with stakeholders such as employees, customers, and suppliers.
Thus, a firm's high CSR score verifies its superior ability to manage relations with stakeholders.
Some prior studies show that firms with good CSR performance tend to have lower levels of
CEO compensation as part of their efforts to improve the relation with employees. In addition,
CEOs of such a firm can be internally compensated for doing the right thing, which makes them
accept relatively low levels of pay. Taken together, a negative relation between CSR
performance and CEO total compensation is anticipated in this case.
However, if CEOs actively engage in CSR activities for the purpose of increasing their
reputation and strengthening their bargaining power, CEO compensation will increase with CSR
performance. According to this story, we cannot rule out the possibility that CSR performance is
positively associated with CEO compensation.
We also conjecture that the relation between CSR and CEO compensation may differ depending
on the components of CEO compensation. CEO compensation can be divided into cash- and
equity-based compensation. Cash-based compensation is regarded as a short-term incentive,
while equity-based compensation is known as an effective tool to mitigate agency problems by
aligning CEOs' interests with those of shareholders. If a firm is socially responsible, its board of
directors will be more likely to design the CEO compensation package in a desirable way for the
effective corporate governance system, compared to boards of directors of socially irresponsible
firms. Therefore, the proportion of equity-based compensation will be relatively higher for
socially responsible firms, while the proportion of cash-based compensation will be relatively
lower. If CSR performance is negatively correlated with CEO compensation, this argument
enables us to predict that the negative association is driven by a relatively low (high) proportion
of cash-based (equity-based) compensation.
This story may not apply in the case that a positive association between CSR performance and
CEO compensation is caused by CEO entrenchment. Given the prior finding that CEOs prefer
13
cash-based compensation to equity-based compensation, such positive relation between CSR
performance and CEO compensation is expected to be driven by a relatively high (low)
proportion of cash-based (equity-based) compensation.
For this analysis, we estimate the following regressions of CEO compensation on CSR scores
with year and industry fixed effects:
𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽 × 𝑇𝐶𝑆𝑅𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (2)
where 𝐶𝑂𝑀𝑃𝑖𝑡 is CEO total compensation ( 𝑇𝐶𝑂𝑀𝑃𝑖𝑡 ), the proportion of cash-based
compensation (𝑃𝐶𝐴𝑆𝐻𝑖𝑡 ), or the proportion of equity-based compensation for firm i in year t
(𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡 ), and 𝑇𝐶𝑆𝑅𝑖𝑡−1 is lagged total CSR score calculated as the sum of net CSR scores
across six CSR categories (community, environment, diversity, employee relations, human rights,
and product) in year t-1. 6
Our main interest in Equation (2) lies in the regression coefficient on
the total CSR score, 𝛽. As addressed above, 𝛽 is expected to be either negative or positive with
the dependent variables of total compensation and the proportions of cash-based and equity-
based compensation.
In order to examine if test results are primarily driven by CSR strengths or concerns, we repeat
the above estimation using CSR strength and concern scores as separate independent variables as
follows:
𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽1 × 𝐶𝑆𝑅_𝑆𝑖𝑡−1 + 𝛽2 × 𝐶𝑆𝑅_𝐶𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (3)
where 𝐶𝑆𝑅_𝑆𝑖𝑡−1 and 𝐶𝑆𝑅_𝐶𝑖𝑡−1 are total strength and concern scores for firm i in year t-1.
Table 4 reports the estimation results of Equations (2) and (3). When we use CEO total
compensation as a dependent variable in the first column, a coefficient on the total CSR score is
significantly positive (0.012). It seems to suggest that CEOs tend to concentrate on CSR
performance with the intention of increasing their own benefits. This positive relation between 6 We conjecture that CEOs' equity-based compensation is determined based on their performance for the previous
year. In terms of cash-based compensation, however, Perry and Zenner (2001) and Comprix and Muller (2006)
address that bonuses are based on the current year's performance, while salaries are determined before the year-end
performance is released. Taken together, a firm's performance may contemporaneously affect the components of
CEO compensation. Given this, we repeat all regression analyses using contemporaneous variables to ensure that
our findings are robust. In unreported tables, the overall results are unchanged in terms of magnitude and
significance. These results are available upon request.
14
CSR performance and CEO total compensation turns out to be mainly driven by a positive
association between the CSR strength score and total compensation. When we use the CSR
strength and concern scores separately as independent variables in the second column,
coefficients on both scores are positive (0.021 and 0.003), but only the coefficient on the strength
score is statistically significant.
[Insert Table 4 about here]
In Columns 3 through 6 of Table 4, we report regression results with the dependent variables of
the proportions of cash- and equity-based compensation. If CEO entrenchment is the main cause
of the positive relation between CSR performance and CEO compensation, we expect to find a
positive association between CSR and the proportion of cash-based compensation and a negative
association between CSR performance and the proportion of equity-based compensation. When
we use the proportion of cash-based compensation as a dependent variable in the third column,
the coefficient on the total CSR score is significantly negative (-0.002). On the other hand, when
we use the proportion of equity-based compensation in the fifth column, the coefficient on the
total CSR score is significantly positive (0.005).
The results suggest that high levels of total compensation for socially responsible firms are
mainly driven by a high proportion of equity-based compensation and a low proportion of cash-
based compensation. This contradicts our prior expectation that CEOs may use CSR activity as a
tool for their own benefits. Even though CEOs seem to engage in CSR activities for their own
interests, a change in compensation structure prevents such behavior from increasing agency
problems and hurting firm value. On the other hand, given the prior finding of the positive
impact of a firm's CSR performance on its financial and operational performance, the positive
relation between CSR and CEO compensation might simply indicate that CEOs are reasonably
compensated for their strong performance in CSR. To sum up, we conclude that socially
responsible firms have CEO compensation structures that mitigate agency problems and
contribute to improving firm value.
We also find that the associations between CSR and the proportions of cash- and equity-based
compensation are mainly driven by CSR strength scores. The regression results with the
independent variables of CSR strength and concern scores in the fourth and sixth columns show
15
that the coefficient on the CSR strength score (-0.004) is significantly negative for the proportion
of cash-based compensation, while it is significantly positive (0.007) for the proportion of
equity-based compensation.
The signs of coefficients on the board of directors and CEO-specific variables from a regression
of total compensation are consistent with prior studies. The coefficient on board size (BSIZE)
(0.156) is significantly positive, and the coefficient on CEO ownership (CEO_OWN) (-0.018) is
significantly negative. These results are consistent with Core et al. (1999) and Lambert et al.
(1993), who show that CEO compensation is higher when boards are less effective and CEO
ownership is higher. The coefficient on CEO duality (CEO_DUR) (0.031) is consistently
positive but insignificant for our sample. On the contrary, the coefficient on the percentage of
independent directors on board (PIND) (0.839) is significantly positive, showing that the
dependence of the board increases CEO total compensation.7 The coefficients on CEO age and
tenure (CEO_AGE and CEO_TEN) are significantly positive (0.01 and 0.011), confirming the
findings of Fahlenbrach (2009) that older CEOs and CEOs with longer tenure tend to receive
higher compensation.
Coefficients on firm-specific variables are also in line with prior findings. The coefficients on
sales and book-to-market are consistent with Core et al. (1999), suggesting that CEOs tend to
earn larger compensation when firms are larger and have higher investment opportunities
proxied by low book-to-market ratios. The positive coefficients on stock return and the standard
deviation of stock return show that CEOs tend to earn larger compensation when firms' stock
returns are higher and the standard deviation of stock returns is higher. The coefficient on firm
age (FAGE) (-0.107) is consistent with Fahlenbrach (2009), indicating that younger firms tend to
pay higher CEO compensation.
Overall, we find that firms with high CSR performance have relatively high levels of CEO
compensation compared to firms with low CSR performance. An in-depth analysis of the
compensation components shows that socially responsible firms tend to have a higher proportion
of equity-based compensation and a lower proportion of cash-based compensation than socially
irresponsible firms. These results suggest that a firm's CSR performance affects not only total
7 Core et al. (1999) also find a negative association between total compensation and the percentage of inside
directors on the board, claiming that there is no evidence that the percentage of inside directors leads to high CEO
compensation.
16
levels of CEO compensation but also the structure of CEO compensation in a way that reduces
agency problems and induces CEOs to align their interests with those of shareholders.
4.3. The effects of CSR on the relation between CEO compensation and firm value
We have shown that a firm's CSR performance has a great impact on CEO compensation
structure. The proportion of cash-based compensation tends to decrease with a firm's CSR
performance, while the proportion of equity-based compensation tends to increase with the CSR
performance. The results have direct implications for the implementation of a firm's CSR policy
and its dynamics with CEO characteristics. More importantly, however, the results imply that the
relation between CSR performance and CEO compensation may essentially affect firm value and
shareholders' wealth.
The effects of CSR and CEO compensation structure on firm value have been investigated
separately in existing studies. The agency theory suggests that granting equity-based
compensation provides CEOs with incentives to align their interests with those of shareholders
and maximize firm value, and it is supported by many early studies (Bryan et al 2000; DeFusco
et al. 1990; McConnell and Servaes 1990; Mehran 1995). A growing literature documents that a
firm's CSR activity improves firm performance and increases shareholders' values. Although we
find that these two factors that crucially affect firm value are closely correlated, it is not clear
how one of them affects the relation between the other and firm value. In particular, a firm's CSR
performance may reinforce or mitigate the effects of the components of CEO compensation on
firm value. Investigating this issue enables us to draw clear implications on the channels through
which a firm's CSR performance influences firm value.
Motivated by this, we investigate how a firm's CSR performance affects the relation between
CEO compensation components and firm value. To analyze this, we run the regression of a
measure for firm value on the total CSR score and the proportion of cash- or equity-based
compensation and their interaction term as follows:
𝑇𝑂𝐵𝐼𝑁𝑄𝑖𝑡 = 𝛼 + 𝛽1 × 𝑇𝐶𝑆𝑅𝑖𝑡−1 + 𝛽2 × 𝑃𝐶𝐴𝑆𝐻𝑖𝑡−1 𝑜𝑟 𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡−1 +
𝛽3 × 𝑃𝐶𝐴𝑆𝐻𝑖𝑡−1 × 𝑇𝐶𝑆𝑅𝑖𝑡−1 (𝑜𝑟 𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡−1 × 𝑇𝐶𝑆𝑅𝑖𝑡−1) + 𝜽′𝜸 + 𝜀𝑖𝑡 (4)
17
Following Faleye (2007), we use Tobin's Q as a proxy for firm value. This is calculated as
market value of assets over book value of assets, where market value is the sum of book value of
assets, market value of common stock, and deferred taxes minus book value of common stock.
For explanatory variables, we include the proportions of cash- and equity-based compensation
and their interaction terms with the total CSR score. We also add to the equation some other
control variables that can possibly affect firm value, such as board size (BSIZE), the percentage
of outside directors on board (PIND), capital expenditure (CAPEX), leverage (LEV), sales
(SALE), and operating profitability (OPPROF).
Given the previous findings addressed above, we expect to find a positive association between
the total CSR score and Tobin's Q. Also, there will be a positive (negative) relationship between
the proportion of equity-based (cash-based) compensation and Tobin's Q. If a firm's CSR
performance reinforces the positive impact of equity-based compensation on firm value, the
coefficient on the interaction term between the proportion of equity-based compensation and the
CSR score will be significantly positive. In the same sense, if a firm's CSR performance
deteriorates the negative impact of cash-based compensation on firm value, the coefficient on the
interaction term between the proportion of cash-based compensation and firm value will be
significantly negative.
Table 5 reports the estimation results. The coefficient on the total CSR score is positive, although
it is not significant when we regress Tobin's Q on CSR, the proportion of equity-based
compensation, and their interaction term in column (2). With respect to the components of CEO
compensation, the coefficient on the proportion of cash-based compensation (-0.353) is
significantly negative, while the coefficient on the proportion of equity-based compensation
(0.562) is significantly positive. The results in general support the previous findings that CSR
performance and equity grants to CEOs have positive impacts on firm value.
In column (2), the coefficient on the interaction term between the proportion of equity-based
compensation and Tobin's Q (0.043) is significantly positive. This suggests that a firm's CSR
performance strengthens the positive effect of equity-based compensation on firm value. Given
our finding of the positive association between CSR performance and the proportion of equity-
based compensation, the result highlights the positive aspect of CSR on both CEO compensation
structure and firm value. Socially responsible firms tend to have a higher proportion of equity-
based compensation, and the positive marginal impact of higher equity-based compensation on
18
firm value is stronger for these firms. This demonstrates that the dynamics between CSR
performance and CEO compensation components boost firm value, which makes a firm's
engagement in CSR activities more valuable.
Overall, our results reveal that a firm's CSR performance not only increases the proportion of
equity-based compensation but also reinforces its positive role in firm value.
5. Additional Tests
5.1. CSR categories and CEO compensation structure
In the previous sections, we used the total CSR score as a measure of CSR performance, which is
calculated as the sum of net CSR scores across six CSR categories. However, if a given CSR
category contains certain issues that could affect CEO compensation, our findings on the effect
of CSR on CEO compensation and its structure can be more or less pronounced. For example,
firms with high CSR scores in employee relations may not exhibit a positive association between
CSR and CEO total compensation, because they particularly attempt to improve employee
relations by reducing CEO compensation.
Motivated by this, we further explore the link between CSR performance and CEO compensation
using the net CSR score on each category. We repeat the above analysis using net CSR scores on
the six categories as independent variables as follows:
𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽1 × 𝐶𝑂𝑀𝑀𝑖𝑡−1 + 𝛽2 × 𝐸𝑁𝑉𝑖𝑡−1 + 𝛽3 × 𝐷𝐼𝑉𝑖𝑡−1 +
𝛽4 × 𝐸𝑅𝑖𝑡−1 + 𝛽5 × 𝐻𝑅𝑖𝑡−1 + 𝛽6 × 𝑃𝑅𝑂𝐷𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (5)
where 𝐶𝑂𝑀𝑀𝑖𝑡−1, 𝐸𝑁𝑉𝑖𝑡−1, 𝐷𝐼𝑉𝑖𝑡−1, 𝐸𝑅𝑖𝑡−1, 𝐻𝑅𝑖𝑡−1, and 𝑃𝑅𝑂𝐷𝑖𝑡−1 are lagged net CSR scores
on community, environment, diversity, employee relations, human rights, and product. The net
CSR score is calculated as the difference between the strength and concern scores on a given
CSR category.
[Insert Table 6 about here]
19
Table 6 reports the estimation results of Equation (5). With the dependent variable of total
compensation, we find that the net CSR score is significantly positively associated with CEO
compensation in community, environment, and diversity. The coefficient on the net score in
employee relations is insignificantly positive, but this does not provide ample evidence that firms
focusing on improving employee relations tend to reduce CEO compensation. When we use the
proportion of cash-based compensation as a dependent variable, the regression coefficient on the
net CSR score is significantly negative in environment and human rights. Meanwhile, the net
CSR score is significantly positively associated with the proportion of equity-based
compensation in the categories of environment, diversity, and employee relations. The positive
relation between the net CSR score in employee relations and the proportion of equity-based
compensation demonstrates that firms paying attention to employee relations tend to have more
incentive-based compensation structure for their CEOs.
Overall, the results show that our findings on the effect of CSR on CEO compensation and its
components are more pronounced in certain CSR categories. The positive association between
CSR and the proportion of equity-based compensation is more pronounced in environment,
diversity and employee relations, while the negative association between CSR and the proportion
of cash-based compensation is more pronounced in environment and human rights.
5.2. The effect of CEO power on compensation structure
We posit that the board of directors plays an independent and important role in designing the
structure of CEO compensation and reducing agency problems.8 However, if CEOs have power
to be involved in the setting of their own compensation, they may exert their influence to design
the compensation for their own interests, leading to an increase in the agency problems. If this is
the case, our main results of the effect of CSR performance on CEO compensation may also
depend on CEOs' involvement in the determination of their compensation components.
Motivated by this, we examine the effect of CEO power on the relation between CSR
performance and CEO compensation components. For this analysis, we use CEO duality as a
8 Many prior studies show that the compensation committee of the board of directors aims to design CEO
compensation to mitigate the agency problem (Core and Guay 1999; Fama and Jensen 1983; Holmstrom 1979;
Jensen and Meckling 1976; Murphy 1985).
20
proxy for CEO power on the determination of compensation.9 The variable of CEO duality is a
dummy variable indicating one if a firm's CEO is a chairman of the board of directors and zero
otherwise. In Table 7, we add to the regression model in Table 4 an interaction term between
CEO duality and CSR performance to test if our results are robust.
[Insert Table 7 about here]
Table 7 reports the estimation results. A coefficient on total CSR score is robustly positive when
we add the interaction term between CEO duality and total CSR score (CEO_DUR × TCSR) and
use total compensation or the proportion of equity-based compensation as a dependent variable.
Although a coefficient on the proportion of cash-based compensation is insignificantly negative,
the overall results confirm that high levels of CEO compensation for socially responsible firms
are mainly driven by a high proportion of equity-based compensation. When we run the
regression of total compensation in Column (1), the coefficient on the interaction term (-0.003) is
negative but insignificant. We also find that the coefficients on the interaction terms are not
statistically significant when we use cash- and equity-based compensation as dependent variables
in Columns (2) and (3). This suggests that our findings above are not affected by CEO duality.
Overall, our results on the effect of CSR performance on CEO compensation structure are robust
to the possible effect of CEO power on the setting of the compensation contract.
5.3. Sarbanes-Oxley Act of 2002 (SOX)
An exogenous shock, such as the enactment of accounting and financial regulations, may affect
the impact of CSR performance on CEO compensation. The implementation of SOX is one
example of an exogenous shock. SOX requires firms to disclose more accurate information and
meet the independence requirements of a firm's board of directors. This suggests that the passage
of SOX paved the way for improving the transparency of accounting disclosures and the
effectiveness of corporate governance system. Given this, the relations between CSR
performance and the components of CEO compensation could be affected by this environmental
9 We have already controlled for this effect by adding CEO duality as one of the control variables in the main
analysis. We use the same measure to analyze the effect of CEO power in more detail in this section.
21
change. In particular, enhancement in the independence of the board of directors might lead to a
more pronounced negative relation between CSR performance and cash-based compensation and
a more pronounced positive relation between CSR and equity-based compensation. Therefore,
our findings in Section 4.2 are expected to be more pronounced during the post-SOX period.
[Insert Table 8 about here]
We divide the sample period into the pre-SOX (1998-2002) and post-SOX periods (2003-2012)
and repeat the analyses shown in Table 4. The regression results are reported in Table 8. The
results for the pre-SOX period in the first three columns show that the coefficient on total CSR
score is not statistically significant no matter if we use total compensation or any of the
compensation components as a dependent variable. On the contrary, our previous results are
robust in the post-SOX period, and the magnitudes of the coefficients are almost identical to
those in Table 4. The total CSR score is significantly positively associated with the total
compensation and the proportion of equity-based compensation, while it is significantly
negatively associated with the proportion of cash-based compensation.
Overall, we find that our results are mainly driven by the post-SOX period. This implies that the
independence of a firm's board of directors and the improved corporate governance system after
SOX play a crucial role in reinforcing the impact of CSR performance on CEO compensation
structure.
5.4. Two-stage least square (2SLS) model
We explore the association between CSR and CEO compensation after controlling for other firm
characteristic and corporate governance variables used in prior studies. Regardless, the problem
of omitted variables may still arise. In this section, we address this concern using a 2SLS
approach with an instrumental variable (IV).
Following Cai, Jo, and Pan (2011), we use the industry median of CSR scores as an IV.10
We
first estimate firm-level CSR scores from a regression of total CSR score on the industry-median.
10
As Cai et al. (2011) point out, the industry-median CSR is one of the IVs that meet both conditions for instrument
relevance and exogeneity in our setup.
22
In the second stage, we run regressions of compensation measures on the estimated value of
firm-level CSR (𝐼𝑉𝐶𝑆𝑅). For the 2SLS regressions, we use the same control variables shown in
Table 4.
[Insert Table 9 about here]
Table 9 reports the 2SLS regression results. The regression coefficients on CSR are consistent
with the coefficients shown in Table 4. Furthermore, the results are stronger in terms of
magnitude and significance compared to the results in Table 4.
Overall, the 2SLS results confirm our findings in this study, supporting that a firm's CSR
performance is positively associated with equity-based compensation and negatively associated
with cash-based compensation.
6. Summary and Conclusion
We investigate how a firm's CSR activity is associated with CEO total compensation and the
compensation structure. We find that socially responsible firms have relatively high levels of
CEO total compensation. This seems to suggest that CEOs strategically engage in CSR activities
to pursue their own interests. However, when we look into the relation between a firm's CSR
performance and each component of compensation, we find that the proportion of equity-based
compensation is positively related to CSR performance, while the proportion of cash-based
compensation is negatively related to CSR performance. These results suggest that a firm's CSR
performance has a great impact not only on levels of CEO total compensation but also on the
compensation structure.
Our results show that, although total levels of CEO compensation tend to increase with a firm's
CSR performance, it is primarily driven by the proportion of equity-based compensation. Given
that equity-based compensation is known as a long-term incentive and plays an important role in
reducing agency problems, we show that a firm's CSR activity affects CEO compensation
structure in a desirable way that motivates CEOs to align their interests with those of
shareholders and eventually increase firm value. This also implies that socially responsible firms
23
have a well-functioning corporate governance system in designing the CEO compensation
package.
We further find that the results are more pronounced in certain CSR categories. The negative
impact of CSR performance on the proportion of cash-based compensation is more pronounced
in environment and human rights, while the positive impact of CSR performance on the
proportion of equity-based compensation is more pronounced in environment, diversity, and
employee relations. Also, our results turn out to be mainly driven by the post-SOX period.
Overall, the results suggest that firms' active engagement in CSR activities and its social
performance improve CEO compensation structure in a way that induces CEOs to maximize firm
values in the long run and reinforces firms’ corporate governance system. Given the fact that
CEOs formulate and implement firms' CSR policies, our results offer important insights into how
and to what extent they determine firms' engagement in CSR activities. Although our study
focuses on the effect of CSR performance on CEO compensation structure, our findings also
suggest avenues for further research on how a firm's CSR performance contributes to forming
the profiles of CEOs and how CEOs perceive their role in firms' CSR activities.
24
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from management. Administrative Science Quarterly 43, 511-637
28
Appendix 1
CSR variables
Variables Strengths Concerns
Qualitative issue areas
Community Charitable giving, innovative
giving, non-US charitable giving,
support for housing, support for
education, indigenous peoples
relations, volunteer programs, and
other strength
Investment controversies,
negative economic impact,
indigenous peoples relations,
tax disputes, and other
concern
Corporate governance Limited compensation, ownership,
transparency, political
accountability, and other strength
High compensation,
ownership, accounting,
transparency, political
accountability, and other
concern
Diversity CEO, promotion, board of
directors, work/life benefits,
women & minority contracting,
employment of the disabled, gay &
lesbian policies, and other strength
Controversies, non-
representation, and other
concern
Employee relations Union relations, no-layoff policy,
cash profit sharing, employee
involvement, retirement benefits
strength, health and safety strength,
and other strength
Union relations, health and
safety, workforce reductions,
retirement benefits, and other
concern
Environment Beneficial products and services,
pollution prevention, recycling,
clean energy, communications,
property/plant/equipment,
management systems, and other
strength
Hazardous waste, regulatory
problems, ozone depleting
chemicals, substantial
emissions, agricultural
chemicals, climate change,
and other concern
Human rights Positive record in South Africa,
indigenous peoples relations, labor
rights, and other strength
South Africa, Northern
Ireland, Burma, Mexico,
labor rights, indigenous
peoples relations, and other
concern
Product Quality, R&D/Innovation, Benefits
to economically disadvantaged, and
other strength
Product safety,
marketing/contracting,
antitrust, and other concern
29
Controversial business issues
Alcohol Licensing, manufacturers, manufacturers of products necessary for
production of alcoholic beverages, retailers, ownership by an
alcohol company, ownership of an alcohol company, and alcohol
other concern
Gambling Licensing, manufacturers, owners and operators, supporting
products or services, ownership by a gambling company, ownership
of a gambling company, and gambling other concern
Tobacco Licensing, manufacturers, manufacturers of products necessary for
production of tobacco, retailers, ownership by a tobacco company,
ownership of a tobacco company, and tobacco other concern
Firearms Manufacturers, retailers, ownership by a firearms company, and
ownership of a firearms company
Military Manufacturers of weapons or weapons systems, manufacturers of
components for weapons or weapons systems, ownership by a
military company, ownership of a military company, minor
weapons contracting involvement, major weapons-related supplier,
and military other concern
Nuclear power Construction & design of nuclear power plants, nuclear power fuel
and key parts, nuclear power service provider, ownership of nuclear
power plants, ownership by a nuclear power company, design, fuel
cycle/key parts, and nuclear power other concern
30
Appendix 2
Variable definitions
Variables Definitions Source
CSR variables KLD STATS
TCSR The sum of net CSR scores in six categories
(community, environment, diversity, employee
relations, human rights, and product). The net
CSR scores are calculated as the total number of
strengths minus the total number of concerns in
each category.
CSR_S Total number of strengths in the six CSR
categories
CSR_C Total number of concerns in the six CSR
categories
COMM Net community CSR scores
DIV Net diversity CSR scores
ENV Net environment CSR scores
ER Net employee relations CSR scores
HR Net human rights CSR scores
PROD Net product CSR scores
Compensation and CEO-specific variables EXECUCOMP
TCOMP The sum of salary, bonus, total value of restricted
stocks and stock options granted during the fiscal
year, long-term incentive payouts, and all other
compensation
CASH The sum of salary and bonus
EQUITY The sum of the value of restricted stocks and the
Black-Scholes value of stock options granted
during the fiscal year11
PCASH The proportion of cash-based compensation to
total compensation
PEQUITY The proportion of equity-based compensation to
total compensation
BSIZE The logarithm of total number of directors on the
board of directors
CEO_AGE CEO age
11
It is calculated as the sum of OPTION_AWARDS_BLK_VALUE and RSTKGRNT before the introduction of
FAS123R in 2006 and the sum of OPTION_AWARDS_FV and STOCK_AWARDS_FV after 2006.
31
CEO_DUR 1 if a CEO is a chairman of the board of
directors, 0 otherwise
CEO_OWN The number of shares owned by CEOs scaled by
the total number of shares outstanding
CEO_TEN The number of years the CEO has held the
current position
PIND Percentage of independent directors on board
Firm-specific variables
BETA Market beta obtained from the regression of a
firms' excess returns on the CRSP value-
weighted index
CRSP
BM Total equity divided by market value of equity
(total number of shares outstanding multiplied by
stock price at the end of the fiscal year)
COMPUSTAT
CAPEX The ratio of capital expenditure to total assets COMPUSTAT
FAGE The logarithm of the number of years during
which a firm has been shown in the CRSP
database
COMPUSTAT
LAGRET Lagged value of the aggregated return CRSP
LEV Total debt divided by total assets COMPUSTAT
LIQ Current assets over current liabilities COMPUSTAT
OPPROF The ratio of operating income before depreciation
to total assets
COMPUSTAT
RET Aggregated return for 12 months CRSP
ROA Operating income before depreciation divided by
book value of assets
COMPUSTAT
SALE The logarithm of sales COMPUSTAT
STDRET Standard deviation of aggregated returns over 5
years
CRSP
TOBINQ Market value of assets (book value of assets +
market value of common stock - book value of
common stock + deferred taxes) over book value
of assets
COMPUSTAT
32
Table 1
Descriptive statistics
This table reports the summary statistics for variables used in the analysis. Panels A, B, and C show the statistics of
CSR, compensation, and CEO characteristic variables, and firm characteristic variables, respectively. The
definitions of the variables are described in Appendix 2.
Panel A. CSR variables
N Mean p25 Median p75 SD
TCSR 7,795 0.23 -1 0 1 2.77
CSR_S 7,795 1.92 0 1 3 2.81
CSR_C 7,795 1.69 0 1 2 1.86
COMM 7,795 0.12 0 0 0 0.57
DIV 7,795 0.22 -1 0 1 1.44
ENV 7,795 0.09 0 0 0 0.98
ER 7,795 -0.01 -1 0 0 1.11
HR 7,795 -0.04 0 0 0 0.3
PROD 7,795 -0.15 0 0 0 0.65
Panel B. Compensation and CEO characteristic variables
N Mean p25 Median p75 SD
TCOMP (000s) 7,739 5,285 1,721 3,379 6,361 8,137
CASH (000s) 7,795 1,035 560 805 1,129 1,428
EQUITY (000s) 7,532 3,213 572 1,665 3,810 7,265
PCASH (%) 7,739 32.6 15.13 24.44 42.45 24.39
PEQUITY (%) 7,529 47.97 33.52 52.64 66.52 25.58
BSIZE 7,795 2.18 2.08 2.2 2.4 0.24
CEO_AGE 7,795 53.6 49 53 58 6.8
CEO_DUR 7,795 0.15 0 0 0 0.36
CEO_OWN 7,588 2.61 0.16 0.64 2.01 6.28
CEO_TEN 7,795 5.89 0 4 8 7.02
PIND (%) 7,795 75.46 66.67 77.78 87.5 13.23
33
Panel C. Firm characteristic variables
N Mean p25 Median p75 SD
BETA 7,795 1.23 0.61 1.12 1.73 0.94
BM 7,795 0.49 0.27 0.43 0.64 0.31
CAPEX 7,675 0.05 0.02 0.04 0.07 0.06
FAGE 7,795 3.05 2.56 3 3.64 0.74
LEV 7,795 0.2 0.04 0.19 0.31 0.16
LIQ 7,795 2.4 1.31 1.93 2.86 1.69
OPPROF 6,343 0.17 0.1 0.15 0.22 0.11
RET (%) 7,795 0.14 -0.06 0.15 0.34 0.37
ROA 7,795 0.11 0.06 0.1 0.15 0.08
SALE 7,795 7.58 6.54 7.46 8.56 1.47
STDRET (%) 7,795 0.39 0.22 0.33 0.5 0.24
TOBINQ 7,231 1.95 1.2 1.58 2.26 1.24
34
Table 2
Pearson correlations
This table reports Pearson correlations between CSR and compensation and CEO-specific variables. The definitions
of the variables are described in Appendix 2, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level,
respectively.
TCSR CSR_S CSR_C TCOMP CASH EQUITY PCASH PEQUITY
TCSR 1
*** 0.78
*** -0.31
*** 0.17
*** 0.03
*** 0.15
*** -0.15
*** 0.15
***
CSR_S
1***
0.35***
0.29***
0.13***
0.23***
-0.24***
0.19***
CSR_C
1***
0.19***
0.15***
0.13***
-0.15***
0.06***
TCOMP
1***
0.37***
0.96***
-0.35***
0.34***
CASH
1***
0.19***
0.06***
0.02***
EQUITY
1***
-0.31***
0.38***
PCASH
1***
-0.73***
PEQUITY
1***
35
Table 3
Impact of CSR disclosure on CEO compensation
This table reports regression results of a set of compensation variables on the disclosure of CSR with year- and
industry-fixed effects. The dependent variables are total compensation and the proportions of cash- and equity-based
compensation over the total compensation. The independent variables are described in Appendix 2. CSRDIS equals
one if a firm has CSR scores in the previous year and zero otherwise. t-statistics are reported in parentheses below
the coefficient estimates, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.
(1) TCOMP (2) PCASH (3) PEQUITY
Intercept 4.044***
1.019***
0.228***
(30.69)***
(27.65)***
(5.75)**
CSRDIS 0.126***
-0.085***
0.011**
(4.55)***
(-11)***
(1.31)**
BSIZE 0.136***
-0.036***
0.027**
(2.87)***
(-2.72)***
(1.86)***
PIND 0.729***
-0.349***
0.182***
(10.89)***
(-18.66)***
(8.98)***
CEO_OWN -0.015***
0.005***
-0.005***
(-11.14)***
(13.65)***
(-12.5)***
CEO_DUR 0.045***
-0.004***
0.018***
(1.81)***
(-0.62)***
(2.35)***
CEO_AGE 0.006***
0.000***
-0.003***
(3.92)***
(0.13)***
(-5.41)***
CEO_TEN 0.011***
0.000***
0.000***
(7.13)***
(-0.63)***
(-0.53)***
SALE 0.384***
-0.046***
0.037***
(44.5)***
(-18.9)***
(14.18)***
BM -0.298***
0.085***
-0.107***
(-8.50)***
(8.63)***
(-10.09)***
ROA -0.884***
0.233***
-0.346***
(-6.64)***
(6.27)***
(-8.59)***
TOBINQ 0.077***
-0.013***
0.02***
(8.59)***
(-5.04)***
(7.55)***
LEV 0.195***
-0.022***
0.004***
(3.24)***
(-1.32)***
(0.23)***
LIQ 0.001***
-0.004***
0.009***
(0.11)***
(-2.15)***
(4.59)***
FAGE -0.079***
0.022***
-0.03***
(-5.71)***
(5.73)***
(-7.11)***
BETA 0.008***
-0.006***
0.001***
(0.84)***
(-2.14)***
(0.28)***
RET 0.201***
-0.022***
-0.009***
(8)***
(-3.16)***
(-1.14)***
36
LAGRET 0.102***
-0.017***
0.016***
(4.37)***
(-2.65)***
(2.32)***
STDRET 0.3***
-0.065***
0.077***
(7.13)***
(-5.54)***
(6.06)***
Year-fixed effects Yes***
Yes***
Yes***
Industry-fixed effects Yes***
Yes***
Yes***
R2 0.402
*** 0.249
*** 0.141
***
37
Table 4
Impact of CSR performance on CEO compensation structure
This table reports regression results of CEO total compensation and the proportions of cash- and equity-based
compensation on CSR with year and industry-fixed effects. The dependent variables are total compensation and the
proportions of cash- and equity-based compensation. The independent variables are described in Appendix 2. For
the CSR variables, we use the total CSR score and the total strength and concern scores in separate regressions. t-
statistics are reported in parentheses below the coefficient estimates, and ‘***’, ‘**’, ‘*’ represent significance at
1%, 5%, and 10% level, respectively.
(1) TCOMP (2) PCASH (3) PEQUITY
Intercept 4.044***
4.216***
0.968***
0.929***
0.220***
0.255***
(24.85)***
(24.46)***
(22.16)***
(20.05)***
(4.56)***
(4.97)***
TCSR 0.012***
-0.002***
0.005***
(2.99)***
(-1.69)***
(4.29)***
CSR_S 0.021***
-0.004***
0.007***
(4.21)***
(-2.71)***
(4.63)***
CSR_C 0.003***
-0.001***
-0.002***
(0.44)***
(-0.73)***
(-1.05)***
BSIZE 0.156***
0.15***
-0.026***
-0.025***
0.031***
0.03***
(2.75)***
(2.64)***
(-1.72)***
(-1.63)***
(1.85)***
(1.79)***
PIND 0.839***
0.823***
-0.424***
-0.418***
0.234***
0.229***
(10.02)***
(9.71)***
(-18.88)***
(-18.34)***
(9.39)***
(9.05)***
CEO_OWN -0.018***
-0.018***
0.006***
0.006***
-0.005***
-0.005***
(-10.23)***
(-10.27)***
(12.24)***
(12.17)***
(-9.84)***
(-9.84)***
CEO_DUR 0.045***
0.039***
0.002***
0.002***
0.01***
0.01***
(1.58)***
(1.37)***
(0.26)***
(0.21)***
(1.22)***
(1.19)***
CEO_AGE 0.01***
0.009***
-0.001***
-0.001***
-0.002***
-0.002***
(5.29)***
(5.04)***
(-2.13)***
(-1.8)***
(-3.7)***
(-3.88)***
CEO_TEN 0.011***
0.011***
0.000***
0.000***
0.000***
0.000***
(5.92)***
(6.08)***
(-0.65)***
(-0.81)***
(-0.06)***
(0.08)***
SALE 0.367***
0.347***
-0.042***
-0.038***
0.034***
0.03***
(36.67)***
(29.44)***
(-15.64)***
(-12)***
(11.38)***
(8.6)***
BM -0.242***
-0.234***
0.054***
0.051***
-0.094***
-0.091***
(-5.06)***
(-4.84)***
(4.24)***
(3.94)***
(-6.6)***
(-6.33)***
ROA -0.909***
-0.862***
0.235***
0.225***
-0.414***
-0.402***
(-5.23)***
(-4.94)***
(5.04)***
(4.79)***
(-8.01)***
(-7.73)***
TOBINQ 0.085***
0.084***
-0.014***
-0.014***
0.024***
0.024***
(6.86)***
(6.77)***
(-4.33)***
(-4.29)***
(6.62)***
(6.53)***
LEV 0.349***
0.355***
-0.053***
-0.056***
0.04***
0.042***
(4.79)***
(4.85)***
(-2.72)***
(-2.87)***
(1.84)***
(1.93)***
LIQ -0.007***
-0.009***
-0.001***
0.000***
0.008***
0.008***
(-0.89)***
(-1.21)***
(-0.31)***
(-0.05)***
(3.72)***
(3.53)***
FAGE -0.107***
-0.114***
0.03***
0.031***
-0.039***
-0.04***
38
(-6.22)***
(-6.51)***
(6.51)***
(6.69)***
(-7.51)***
(-7.72)***
BETA 0.013***
0.013***
-0.005***
-0.005***
-0.001***
-0.001***
(1.11)***
(1.07)***
(-1.58)***
(-1.55)***
(-0.2)***
(-0.19)***
RET 0.203***
0.209***
-0.028***
-0.03***
-0.017***
-0.015***
(6.58)***
(6.76)***
(-3.43)***
(-3.58)***
(-1.84)***
(-1.64)***
LAGRET 0.076***
0.078***
-0.011***
-0.011***
0.008***
0.008***
(2.72)***
(2.79)***
(-1.48)***
(-1.52)***
(0.91)***
(0.94)***
STDRET 0.228***
0.218***
-0.02***
-0.018***
0.044***
0.042***
(4.57)***
(4.35)***
(-1.53)***
(-1.36)***
(2.94)***
(2.78)***
Year-fixed effects Yes***
Yes***
Yes***
Yes***
Yes***
Yes***
Industry-fixed effects Yes***
Yes***
Yes***
Yes***
Yes***
Yes***
R2 0.38
*** 0.38
*** 0.209
*** 0.209
*** 0.133
*** 0.133
***
39
Table 5
Impacts of CSR performance on the relation between CEO compensation and firm value
This table reports regression results of Tobin's Q on the total CSR score and the proportion of cash- or equity-based
compensation and their interaction term with year and industry-fixed effects. The dependent and independent
variables are described in Appendix 2. t-statistics are reported in parentheses below the coefficient estimates, and
‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.
(1) (2)
Intercept 2.832***
2.465***
(19.67)***
(18.57)***
TCSR 0.042***
0.016***
(6.17)***
(1.39)***
PCASH -0.353***
(-6.41)***
PCASH× TCSR 0.001***
(0.03)***
PEQUITY
0.562***
(11.1)***
PEQUITY× TCSR
0.043***
(2.22)***
BSIZE -0.192***
-0.208***
(-3.04)***
(-3.25)***
PIND -0.618***
-0.618***
(-6.16)***
(-6.25)***
CAPEX -2.163***
-2.3***
(-9.68)***
(-9.94)***
LEV -1.077***
-1.109***
(-13.62)***
(-13.81)***
SALE -0.088***
-0.085***
(-8.19)***
(-7.85)***
OPPROF 6.423***
6.45***
(55.34)***
(55.13)***
Year-fixed effects Yes***
Yes***
Industry-fixed effects Yes***
Yes***
R2 0.418
*** 0.427
***
40
Table 6
Impact of CSR performance for each category on CEO compensation structure
This table reports regression results of CEO total compensation and the proportions of cash- and equity-based
compensation on the net CSR score on each CSR category with year and industry-fixed effects. The dependent
variables are total compensation and the proportions of cash- and equity-based compensation. The independent
variables are described in Appendix 2. t-statistics are reported in parentheses below the coefficient estimates, and
‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.
(1) TCOMP (2) PCASH (3) PEQUITY
Intercept 4.197***
0.993***
0.21***
(25.27)***
(22.27)***
(4.24)***
COMM 0.055***
0.003***
-0.002***
(2.69)***
(0.57)***
(-0.32)***
ENV 0.022***
-0.016***
0.009***
(1.9)***
(-5)***
(2.59)***
DIV 0.021***
0.005***
0.005***
(2.42)***
(2.13)***
(1.85)***
ER 0.004***
0.001***
0.007***
(0.34)***
(0.31)***
(1.99)***
HR -0.055***
-0.021***
0.009***
(-1.43)***
(-2.06)***
(0.75)***
PROD -0.064***
0.007***
0.002***
(-3.78)***
(1.48)***
(0.3)***
BSIZE 0.141***
-0.034***
0.033***
(2.49)***
(-2.21)***
(1.96)***
PIND 0.819***
-0.419***
0.233***
(9.77)***
(-18.6)***
(9.28)***
CEO_OWN -0.019***
0.006***
-0.005***
(-10.5)***
(12.04)***
(-9.75)***
CEO_DUR 0.042***
-0.001***
0.011***
(1.48)***
(-0.07)***
(1.27)***
CEO_AGE 0.01***
-0.001***
-0.002***
(5.27)***
(-1.74)***
(-3.74)***
CEO_TEN 0.011***
0.000***
0.000***
(6)***
(-0.73)***
(0.01)***
SALE 0.346***
-0.044***
0.034***
(32.23)***
(-15.3)***
(10.61)***
BM -0.229***
0.057***
-0.094***
(-4.79)***
(4.43)***
(-6.61)***
ROA -0.884***
0.243***
-0.413***
(-5.09)***
(5.2)***
(-7.98)***
TOBINQ 0.083***
-0.015***
0.024***
41
(6.71)***
(-4.53)***
(6.55)***
LEV 0.351***
-0.046***
0.038***
(4.8)***
(-2.32)***
(1.74)***
LIQ -0.009***
0.000***
0.008***
(-1.16)***
(-0.09)***
(3.69)***
FAGE -0.102***
0.027***
-0.037***
(-6.31)***
(6.31)***
(-7.58)***
BETA 0.017***
-0.005***
-0.001***
(1.38)***
(-1.65)***
(-0.17)***
RET 0.211***
-0.026***
-0.017***
(6.84)***
(-3.13)***
(-1.83)***
LAGRET 0.086***
-0.006***
0.007***
(3.06)***
(-0.81)***
(0.85)***
STDRET 0.223***
-0.022***
0.044***
(4.46)***
(-1.66)***
(2.96)***
Year-fixed effects Yes***
Yes***
Yes***
Industry-fixed effects Yes***
Yes***
Yes***
R2 0.384
*** 0.214
*** 0.134
***
42
Table 7
Impact of CEO power on the CSR - CEO compensation relationship
This table reports regression results of CEO total compensation and the proportions of cash- and equity-based
compensation on CSR and an interaction term between CEO duality and CSR (CEO_DUR × TCSR) with year and
industry-fixed effects. The dependent variables are total compensation and the proportions of cash- and equity-based
compensation. The independent variables are described in Appendix 2. t-statistics are reported in parentheses below
the coefficient estimates, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.
(1) TCOMP (2) PCASH (3) PEQUITY
Intercept 4.044***
0.968***
0.22***
(24.85)***
(22.16)***
(4.56)***
TCSR 0.013***
-0.002***
0.005***
(2.83)***
(-1.36)***
(3.98)***
BSIZE 0.155***
-0.026***
0.031***
(2.75)***
(-1.73)***
(1.85)***
PIND 0.839***
-0.424***
0.234***
(10.02)***
(-18.88)***
(9.39)***
CEO_OWN -0.018***
0.006***
-0.005***
(-10.23)***
(12.23)***
(-9.84)***
CEO_DUR 0.046***
0.002***
0.01***
(1.59)***
(0.27)***
(1.22)***
CEO_DUR× TCSR -0.003***
-0.001***
-0.001***
(-0.27)***
(-0.42)***
(-0.22)***
CEO_AGE 0.01***
-0.001***
-0.002***
(5.3)***
(-2.12)***
(-3.69)***
CEO_TEN 0.011***
0.000***
0.000***
(5.92)***
(-0.65)***
(-0.06)***
SALE 0.367***
-0.042***
0.034***
(36.66)***
(-15.65)***
(11.37)***
BM -0.242***
0.054***
-0.094***
(-5.06)***
(4.24)***
(-6.6)***
ROA -0.909***
0.235***
-0.414***
(-5.22)***
(5.04)***
(-8)***
TOBINQ 0.085***
-0.014***
0.024***
(6.86)***
(-4.33)***
(6.62)***
LEV 0.35***
-0.053***
0.04***
(4.79)***
(-2.71)***
(1.84)***
LIQ -0.007***
-0.001***
0.008***
(-0.89)***
(-0.31)***
(3.73)***
FAGE -0.107***
0.03***
-0.038***
(-6.22)***
(6.51)***
(-7.5)***
BETA 0.013***
-0.005***
-0.001***
(1.11)***
(-1.58)***
(-0.2)***
43
RET 0.203***
-0.028***
-0.017***
(6.58)***
(-3.43)***
(-1.83)***
LAGRET 0.076***
-0.011***
0.008***
(2.73)***
(-1.46)***
(0.92)***
STDRET 0.228***
-0.021***
0.044***
(4.56)***
(-1.53)***
(2.94)***
Year-fixed effects Yes***
Yes***
Yes***
Industry-fixed effects Yes***
Yes***
Yes***
R2 0.38
*** 0.209
*** 0.133
***
44
Table 8
Impact of CSR performance on CEO compensation structure: pre- and post-SOX periods
This table reports regression results of CEO total compensation and the proportions of cash- and equity-based
compensation on CSR during the pre-SOX (1998-2002) and post-SOX (2003-2012) periods. The dependent
variables are total compensation and the proportions of cash- and equity-based compensation. The independent
variables are described in Appendix 2. t-statistics are reported in parentheses below the coefficient estimates, and
‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.
(1) Pre-SOX (1998-2002) (2) Post-SOX (2003-2012)
TCOMP PCASH PEQUITY TCOMP PCASH PEQUITY
Intercept 6.388***
0.969***
0.513***
3.965***
0.951***
0.19***
(5.62)***
(3.44)***
(1.66)***
(24.11)***
(21.41)***
(3.86)***
TCSR -0.018***
0.007***
-0.003***
0.013***
-0.002***
0.005***
(-0.55)***
(0.89)***
(-0.37)***
(3.07)***
(-1.97)***
(4.41)***
BSIZE 0.349***
-0.182***
0.091***
0.158***
-0.024***
0.023***
(1.12)***
(-2.37)***
(1.02)***
(2.75)***
(-1.53)***
(1.32)***
PIND 1.374***
-0.319***
0.232***
0.802***
-0.416***
0.266***
(3.32)***
(-3.11)***
(2.03)***
(9.15)***
(-17.6)***
(10.11)***
CEO_OWN -0.02***
0.003***
-0.008***
-0.018***
0.006***
-0.005***
(-1.71)***
(0.92)***
(-2.35)***
(-10.02)***
(12.3)***
(-9.37)***
CEO_DUR 0.056***
0.034***
0.001***
0.041***
0.002***
0.009***
(0.3)***
(0.74)***
(0.03)***
(1.42)***
(0.25)***
(1.02)***
CEO_AGE 0.006***
0.001***
-0.002***
0.01***
-0.001***
-0.002***
(0.45)***
(0.28)***
(-0.53)***
(5.22)***
(-1.84)***
(-3.2)***
CEO_TEN 0.018***
-0.006***
0.000***
0.011***
0.000***
0.000***
(1.24)***
(-1.77)***
(0.03)***
(5.93)***
(-0.12)***
(-0.06)***
SALE 0.178***
-0.005***
0.002***
0.371***
-0.043***
0.034***
(2.81)***
(-0.35)***
(0.1)***
(36.84)***
(-15.62)***
(11.31)***
BM -1.23***
0.149***
-0.223***
-0.201***
0.054***
-0.089***
(-3.97)***
(1.94)***
(-2.67)***
(-4.11)***
(4.1)***
(-6.05)***
ROA -3.971***
0.591***
-0.891***
-0.725***
0.194***
-0.359***
(-4.18)***
(2.51)***
(-3.52)***
(-4.04)***
(4)***
(-6.66)***
TOBINQ 0.064***
-0.024***
0.021***
0.085***
-0.011***
0.021***
(1.6)***
(-2.38)***
(1.94)***
(5.96)***
(-2.89)***
(4.84)***
LEV -0.208***
-0.027***
0.044***
0.353***
-0.052***
0.028***
(-0.42)***
(-0.22)***
(0.33)***
(4.82)***
(-2.63)***
(1.26)***
LIQ -0.133***
0.019***
-0.009***
-0.004***
-0.001***
0.009***
(-2.37)***
(1.38)***
(-0.63)***
(-0.53)***
(-0.58)***
(3.88)***
FAGE -0.197***
0.01***
-0.033***
-0.098***
0.029***
-0.037***
(-1.96)***
(0.41)***
(-1.14)***
(-6.07)***
(6.56)***
(-7.68)***
BETA 0.043***
-0.042***
0.027***
0.008***
-0.002***
-0.001***
(0.5)***
(-1.97)***
(1.18)***
(0.7)***
(-0.63)***
(-0.28)***
RET 0.043***
0.004***
-0.007***
0.215***
-0.031***
-0.016***
45
(0.24)***
(0.08)***
(-0.14)***
(6.9)***
(-3.72)***
(-1.7)***
LAGRET 0.342***
-0.108***
0.069***
0.057***
-0.005***
0.002***
(2.19)***
(-2.79)***
(1.63)***
(2.04)***
(-0.66)***
(0.25)***
STDRET 0.074***
-0.07***
-0.007***
0.228***
-0.02***
0.044***
(0.19)***
(-0.73)***
(-0.06)***
(4.58)***
(-1.46)***
(2.94)***
Year-fixed effects Yes***
Yes***
Yes***
Yes***
Yes***
Yes***
Industry-fixed effects Yes***
Yes***
Yes***
Yes***
Yes***
Yes***
R2 0.318
*** 0.233
*** 0.216
*** 0.393
*** 0.214
*** 0.13
***
46
Table 9
Two-stage least squares regressions (2SLS)
This table reports results of the 2SLS regressions with an instrumental variable. In the first stage, we obtain the fitted
value of firm-level CSR (IVCSR) from a regression of a total CSR score on the industry median of CSR scores. In
the second-stage regression, we regress total compensation or the proportions of cash- and equity-based
compensation on the estimated value of the CSR scores from the first-stage regression with year-fixed effects. The
independent variables are described in Appendix 2. t-statistics are reported in parentheses below the coefficient
estimates, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.
TCOMP PCASH PEQUITY
Intercept 4.252***
0.847***
0.336***
(20.54)***
(15.87)***
(5.48)***
IVCSR 0.038***
-0.006***
0.008***
(3.16)***
(-2.04)***
(2.2)***
BSIZE 0.157***
-0.037***
0.028***
(2.76)***
(-2.54)***
(1.66)***
PIND 0.793***
-0.267***
0.249***
(8.68)***
(-11.33)***
(9.26)***
CEO_OWN -0.017***
0.005***
-0.005***
(-9.68)***
(11.67)***
(-9.4)***
CEO_DUR 0.031***
-0.002***
0.014***
(1.01)***
(-0.28)***
(1.53)***
CEO_AGE 0.009***
0.000***
-0.002***
(4.57)***
(0.4)***
(-3.63)***
CEO_TEN 0.011***
0.000***
0.000***
(5.71)***
(0.03)***
(-0.32)***
SALE 0.373***
-0.042***
0.035***
(37.45)***
(-16.28)***
(11.97)***
BM -0.26***
0.087***
-0.105***
(-5.32)***
(6.92)***
(-7.31)***
ROA -0.971***
0.346***
-0.409***
(-5.51)***
(7.61)***
(-7.86)***
TOBINQ 0.091***
-0.019***
0.023***
(7.22)***
(-5.96)***
(6.21)***
LEV 0.353***
-0.073***
0.027***
(4.81)***
(-3.88)***
(1.25)***
LIQ -0.007***
-0.001***
0.008***
(-0.97)***
(-0.34)***
(3.78)***
FAGE -0.102***
0.027***
-0.037***
(-6.27)***
(6.46)***
(-7.77)***
BETA 0.013***
-0.004***
0.003***
(1.09)***
(-1.16)***
(0.9)***
RET 0.176***
-0.029***
-0.024***
47
(4.8)***
(-3.11)***
(-2.23)***
LAGRET 0.075***
-0.018***
-0.006***
(2.23)***
(-2.1)***
(-0.63)***
STDRET 0.203***
-0.025***
0.036***
(3.94)***
(-1.88)***
(2.34)***
Year-fixed effects Yes***
Yes Yes***
R2 0.381
*** 0.268 0.142
***