Executive compensation and corporate social responsibility: does a golden parachute matter?

Abstract

PurposeThis study examines the efficacy of compensation in encouraging corporate executives to promote corporate social responsibility (CSR). In particular, it closely examines the effect of a golden parachute (GP) on an executive's behavior toward CSR.Design/methodology/approachThis study uses longitudinal data on 1,301 US firms for the period from 1993 to 2013. The data comes from Compustat, MSCI ESG STATS, RiskMetrics and ExecuComp.FindingsWe find an inverse association between current and long-term compensations and GP on firms' CSR. However, a test on the moderating effect discloses that a GP and long-term compensation jointly and positively increase the firms' CSR performance. This increase supports the idea that executives with a GP seek to maximize their long-term wealth by approving CSR projects that add value. The results also show that female executives are more likely to promote CSR than their male counterparts, and older executives are less willing to engage in CSR projects.Practical implicationsAdding a GP contractual clause to the executive compensation package could encourage greater engagement in CSR projects. The CEO with a GP will ensure that the firm engages in only value-enhancing CSR projects; this should align the interest of the society (greater firm engagement in CSR) with the interest of the firm (value maximization).Originality/valueThis study contributes to the literature by examining the moderating effect of a GP on the association between CSR and executive compensation.

Executive compensation and sustainable business practices: The moderating role of sustainability‐based compensation

“…It depicts that CEO pay is crucial determinant of ESGP and ENVP of UK listed firms. The positive effect of CEO pay variables on ESGP and ENVP is also consistent with the findings of prior studies(Berrone & Gomez-Mejia, 2009;Cordeiro & Sarkis, 2008), and the theoretical predictions of economic view of NIT that CEO pay can play an important role in enhancing ESGP and ENVP by encouraging CEOs to pursue projects that enhance SBPs and environmental performance of firms(Haque & Ntim, 2020;Okafor &…”

“…The findings support the argument that because the CEO is the locus of control, CEO's pay can be structured based on factors such as GHGP (Haque & Ntim, 2020; Stanwick & Stanwick, 2001). For example, incentive pay policy can encourage CEOs to allocate resources toward clean and efficient energy which can reduce GHG emissions (Aslam et al, 2021; Okafor & Ujah, 2020). Empirically, the obtained result for the link between BCEO and GHGP provides empirical support for the results of Frye et al (2006) who document similar evidence.…”

“…Crucially, this practice may not encourage SBPs (Maas, 2018). Meanwhile, such compensation scheme can incentivize CEOs to pursue projects that maximize the firms' value in the long term (Okafor & Ujah, 2020).…”

“…Empirically, studies on the moderating impact of SBC on the EC– SBP nexus are uncommon (Haque & Ntim, 2020; Okafor & Ujah, 2020). In a related study, Haque and Ntim (2020) show that ESG ‐based compensation policy has a positive moderating effect on the relationship between EC and the process‐oriented carbon performance in European countries.…”

“…The resulting improvements in GHG emission reduction will be of benefit to shareholders, executives, humanity, and the wider environment (Mazouz & Zhao, 2019). This is critically important within the context of SBPs that require substantial long‐term investments (Haque & Ntim, 2018; Okafor & Ujah, 2020), which may discourage executives from undertaking actual GHG emission reduction projects. In that case, corporate executives may rely on impression management strategies to symbolically improve the impact of firms' activities on climate change (Talbot & Boiral, 2015).…”