The impact of two types of CEO overcompensation on corporate social responsibility

Abstract

This article explores the impact of two types of CEO overcompensation—internal and external overcompensation—on the socially responsible activities of firms. Using a panel dataset of U.S. firms, this study tests its hypotheses and finds that CEO internal overcompensation discourages corporate social responsibility (CSR), due to strong CEO internal dominance and power in achieving CEO’s short-term career goals. By contrast, CEO external overcompensation promotes CSR performance because of CEOs interests in maintaining status and reputation in the industry. Moreover, when firm financial performance is good, the relation between internal overcompensation and CSR performance becomes positive, while older CEO and high industry-level CSR performance strengthens the relation between external overcompensation and CSR performance. In sum, contradicting CSR performance levels, resulting from different types of CEO overcompensation, are supported by our analyses. Theoretical and practical implications will be discussed.