Abstract
We use CEO pay sensitivity to stock performance (delta) and stock volatility (vega) to provide empirical evidence that CEO compensation structure influences firm Corporate Social Responsibility (CSR) performance. We find that delta has no significant effect on CSR, while vega has a strong, causal relationship with CSR. Our findings suggest that CEOs do not view CSR as value enhancing, but as a way to increase their own compensation through vega. Firms that want to improve their social performance should consider vega as an important compensation incentive for executives.
Highlights
This paper draws a causal relation between CEO compensation structure and firm corporate social responsibility (CSR)
Employing fixed effects models and controlling for firm size, risk level, and industry, we find that Corporate Social Responsibility (CSR) standing is significantly positively related to measures of vega but not significantly related to measures of delta
We developed a model to estimate CSR ratings as a function of CEO pay sensitivity to delta and vega
Summary
This paper draws a causal relation between CEO compensation structure and firm corporate social responsibility (CSR). An optimal compensation contract is one that promotes the managerial decision making that maximizes shareholder value This involves exposing the CEO to varying risk/reward incentive combinations via cash, stock, and options payments in an effort to mitigate the agency problem [11]. There is extensive literature examining the effect of delta and vega on CEO decision making [6,7,11]; the effect of delta and vega on CSR levels has not previously been explored This shareholder value-maximization problem is further complicated by the issue of whether CSR is a value-enhancing investment opportunity for a given firm.
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