How does CSR affect workers’ compensation? An approach by the theory of incentives

Abstract

Many empirical papers about CSR deal with the link between CSR and firms’ economic performance, or the effect of CSR on employees’ wages. In both cases, the empirical effect of CSR can be negative, positive or neutral; and it is difficult to understand why. This paper provides a full model theoretically explaining the interaction between CSR, firms’ performance and employees’ wages. Our model is a Principal–Agent model where a firm is the Principal and a worker is the Agent, and where the Agent is free of any external motivation. Our model permits in particular to predict the impact of CSR on employees’ compensation and to understand why the assortative matching between workers and firms in terms of CSR can be negative. Our model provides insights into why empirical results on the link between CSR and wages or between CSR and firms’ economic performance have been mixed. From a managerial standpoint, our paper emphasizes that before deciding to become CSR oriented, a firm must look at the strength of its position on the market of goods and service, the efficiency of its organizational and technological function, the alignment of its employees to its values, and the distribution of CSR characteristics on the labor market.