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J. of Multi. Fin. Manag.

29 (2015) 46–65

Contents lists available at ScienceDirect

Journal of Multinational Financial
Management
journal homepage: www.elsevier.com/locate/econbase

CEO compensation and corporate social
responsibility
Ming Jian a, Kin-Wai Lee b,∗
a

Nanyang Technological University, Singapore, Singapore
S3-B2A-19 Nanyang Avenue, Nanyang Business School, Nanyang Technological University,
Singapore 639798, Singapore
b

a r t i c l e

i n f o

Article history:
Received 15 October 2014
Accepted 25 November 2014
Available online 3 December 2014
JEL classification:
G30
G34
M1
M2
Keywords:
Corporate social responsibility (CSR)
CEO compensation
Corporate governance

a b s t r a c t
We examine the association between CEO compensation and corporate social responsibility (CSR). We find that CEO compensation
is negatively associated with CSR investment. We find CEO compensation is positively associated with normal CSR, suggesting that
CEO is rewarded for investing in optimal level of CSR. The positive
association between CEO compensation and normal CSR is more
pronounced in firms with stronger corporate governance. However,
CEO compensation level is negatively associated with abnormal
CSR, suggesting that when CSR investment deviates from its optimal level, CEOs receive lower compensation level for excessive
CSR investments. Firms with good corporate governance penalize
abnormal CSR.
© 2014 Published by Elsevier B.V.

1. Introduction
Conventional wisdom suggests that firms should reward CEO for undertaking corporate social
responsibility (CSR) which improves firm performance. Corporate governance and CSR advocates such
as Global Reporting Initiatives and Corporate Register recommend that compensation of top level
management should reflect CSR. For instance, the 2013 joint report by the Investor Responsibility

∗ Corresponding author. Tel.: +65 6790 4663; fax: +65 6792 4217.
E-mail addresses: amjian@ntu.edu.sg (M. Jian), akwlee@ntu.edu.sg (K.-W. Lee).
http://dx.doi.org/10.1016/j.mulfin.2014.11.004
1042-444X/© 2014 Published by Elsevier B.V.

M. Jian, K.-W. Lee / J. of Multi. Fin. Manag. 29 (2015) 46–65

47

Research Center and the Sustainable Investments Institutes suggest that 43% of the Fortune 500 firms
tie executive compensation to CSR.1 The overall empirical evidence on the association between CEO
compensation and CSR is inconclusive. On one hand, Berrone and Gomez-mejia (2009) find that in
polluting industries, good environmental performance increases CEO compensation.2 On the other
hand, contrary to conventional wisdom, other studies find that CEO compensation level is negatively
associated with CSR (Coombs and Gilley, 2005; Russo and Harrison, 2005; Stanwick and Stanwick,
2001).
While the preceding studies differ in sample, time period and method, they do not explicitly consider the heterogeneity in CSR investments. For example, Borghesi et al. (2014: 164) find that “in some
instances, CSR investments enhance shareholder value. However, in other cases, altruistic managers
or managers who privately benefit from the positive attention arising from these activities may choose
to make CSR investments even if they are not value enhancing.” By introducing the concepts of normal (value increasing) CSR and abnormal (value decreasing) CSR, our paper revisits the association
between CEO compensation and CSR investment and aims to provide new insights to the puzzling
findings of the previous papers.
We posit that the association between CEO compensation and CSR depends on whether CSR investments are value increasing or value decreasing. Furthermore, it is plausible that association between
CEO compensation and CSR may vary systematically across different corporate governance structures.
Accordingly, we examine whether there is an interplay between corporate governance structures and
CSR investments in affecting CEO compensation.
We begin our analysis by considering two alternative views on the association between CEO
compensation and CSR. Under the first view, greater CSR investment enhances shareholders’ value
because better CSR investment is associated with better retention of high quality employees (Greening
and Turban, 2000), higher demand for the firm’s products (Navarro, 1988), higher customer loyalty
(Maignan et al., 1999; Sen and Bhattacharya, 2001) and higher access to valuable resources (Cochran
and Wood, 1984; Cheng et al., 2014). Other studies find that CSR is associated with better non-financial
performance such as higher operational efficiencies (Sharma and Vredenburg, 1998) and higher product quality (Johnson and Greening, 1999). These studies draw extensively from the stakeholder value
maximization theory (Cornell and Shapiro, 1987; Hill and Jones, 1992; Jensen and Meckling, 1976;
Oliver et al., 2014; Servaes and Tamayo, 2013; Tang et al., 2014), the theme of which is that a firm is
a nexus of contracts between shareholders and other stakeholders (such as customers, suppliers and
employees). Each group of stakeholders supplies the firm with critical resources in exchange for claims
outlined in explicit contracts (e.g., wage contracts and product warranties) or suggested in implicit
contracts (e.g., promises of job security to employees and continued service to customers). If higher
CSR investment is associated with greater firm-specific focus on the interests of other stakeholders
(such as customers, suppliers and employees), these stakeholders are more likely to support the firm’s
operation, which increases shareholders’ value. Stated differently, CSR activities have a positive effect
on shareholders’ value because focusing on the interests of other stakeholders increases their willingness to support a firm’s operation, which in turn increases shareholders’ value.3 In the context of
our study, if higher CSR is associated with higher shareholders’ value, we expect CEO to be rewarded
for his effort in improving CSR investment. Hence, we predict a positive association between CSR and
CEO compensation. We refer to this view as the value-creation hypothesis.
Under the second view, CSR is associated with investments in negative net present value projects
that destroy shareholders’ value. The key to this view is that managers may over-invest in CSR
that transfer wealth from shareholders to other stakeholders (such as community, regulators and

1

http://www.csrhub.com/blog/2013/05/top-companies-tie-compensation-to-sustainability.html.
The authors focus on firms from industries subject to reporting under the Environmental Protection Agency’s Toxics Release
Inventory, a program that requires facilities exceeding a threshold level to report their emissions.
3
We acknowledge that institutional forces can often lead to symbolic rather than genuine CSR actions and policies whereby
firms may appear to engage in CSR, but these initiatives are simply intended to appease stakeholder demands or meet the
minimum requirements of standards. Under this view, if CSR is purely symbolic without any effect on shareholders’ value, we
expect no association between CEO compensation and CSR. However, if symbolic CSR reduces shareholders’ value, we expect
a negative association between CEO compensation and CSR.
2

For example.. Barnea and Rubin. Fabrizi et al. In such a case. of Multi.g. career concerns may drive managers to manipulate the flow of information relating to the resolution of uncertainty surrounding CSR investment (Hirshleifer. At first glance. Fin. such as myopic CSR investment (Narayanan. One reason is that firm characteristics and manager characteristics that drives the optimal levels change with time (Core and Guay. 1986). 2001). If we assume that “all firms are optimizing all the time. Surroca and Tribó. Manag. 1985) and overinvestment (Holmstrom and Costa. it is plausible that firm policies and managerial decisions deviate from the optimal levels. Hirshleifer and Thakor. 1993.. 2001. 1986). and leave personal legacies that destroy shareholders’ wealth (e. any statistically significant association between CEO compensation related to the abnormal CSR ought to occur only because of measurement error. It predicts a negative association between CSR and CEO compensation. Ittner and Larcker. To address this question.-W. We interpret our results as consistent with the value-destruction hypothesis. managers’ career concerns might make them focus excessively on short-term profit and distort their investment decisions. 1985. 1990. the negative association between that CEO compensation level and CSR investment may seem puzzling.4 Third. managerial reputation building can encourage herding of CSR investment and lead to over-investments (Scharfstein and Stein. 1999). For example. In reality. Trueman. misspecification of functional form or an inadequate set of controls. 2010. enhance their personal status with stakeholders. the value-creation (value-destruction) hypothesis predicts a positive (negative) association between CEO compensation and CSR. In summary. This result holds after controlling for standard economic determinants of CEO compensation (such as firm size. Our results suggest that CEO compensation level is negatively associated with CSR investment. firms and managers do exhibit sub-optimal decisions as organizations adapt by experimentation and imitation (Ittner and Larcker. 2004. Cespa and Cestone. 1992). operating profitability and stock returns) and CEO characteristics (such as age and tenure). If one were to subscribe to the extreme optimization perspective that all firms in the sample are optimizing with respect to their CSR investments all the time. 2007. 2008). We refer to this view as the value-destruction hypothesis. managers often overinvest in CSR for private rent-seeking benefits to secure their personal reputations in the community.. who suggest that although firms are continuously strive to optimize their corporate financial policies. Milgrom and Roberts. but as a mechanism to enhance their stature as corporate citizens (e. Jian. there are many legitimate reasons to expect firm policies and managerial decision to deviate from their optimal levels. 29 (2015) 46–65 employees). growth opportunities. Hemingway and Maclagan. K. to increase his personal reputation in the managerial labor market. it is an empirical issue whether the value-creation hypothesis dominates the value-destruction hypothesis in terms of the net impact of CSR on CEO compensation. Larcker (2003) argues that although firms continuously strive to optimize their corporate financial policies.48 M. It is important to distinguish normal CSR and abnormal CSR for at least two reasons. However. we draw on the insight from Larcker (2003). 2014). Lee / J. Second. First. we conjecture it is important to distinguish normal CSR (which relates to the optimal level of CSR investment that potentially increases shareholders’ value) and abnormal CSR (which relate to excessive CSR investment that can potentially destroy shareholders’ value).g. as managers have incentives to use CSR investment to build their personal reputations. there should be no statistically significant association between CEO compensation and abnormal CSR (Demsetz and Lehn. Another reason could be changes in legal and other institutional environment that shift the optimal level. CEO may delay the release of bad news about inefficient CSR investments.” there is no way for researchers to provide any insight into the consequences of managerial 4 Specifically. 1992). CEOs might invest in CSR just for cosmetic or ceremonial reasons with little or no economic payoff accruing to the firm. Ultimately. A natural question is that why a CEO would undertake actions to increase firm-specific CSR investment if he is penalized for high CSR investment. To shed light on the prior inconclusive findings on the association between CEO compensation and CSR. First. this is an extreme view of the world but not a useful framework for structuring research. and incorporate it into a CEO compensation-CSR investments framework. but these investments may reduce shareholders’ value in at least three ways. .

we contribute to the corporate governance literature by demonstrating that effective corporate governance structures play an important role in monitoring and rewarding CSR investment and thus affect the association between CEO compensation and CSR investment. which may be enhanced by having a reputation for championing socially responsible investments. to allow for the possibility of such dynamic learning toward the optimal choice.. In firms with strong corporate governance. (2014) suggest that companies evaluate socially responsible investments in a way similar to all other investments. Jian. we provide evidence that in setting CEO compensation. 29 (2015) 46–65 49 choices (Larcker. Lee / J. Stated differently. effective corporate governance structure curtails agency costs by reducing CEO’s compensation level in firm that over-invested in CSR. McWilliams and Siegel. Stated differently. Fin. To the extent that normal CSR reflects the optimal level of CSR investment. firms appear to distinguish between normal CSR and abnormal CSR. CEO is punished for excessive investments in CSR investment. They are undertaken if (1) they create value for investors. Second. Wu. Titman et al. it is likely that all organizations are dynamically learning and moving toward the optimal level. (2011) that . Second. 1988. we extend CEO compensation research that has extensively focused on the financial performance. Manag. by separating normal CSR and abnormal CSR. We then investigate whether there are systematic differences in the association between CEO compensation and normal CSR (abnormal CSR) across different corporate governance structures. 2000.. We interpret our result as suggesting that strong corporate governance curtails the incentives of CEO to over-invest in CSR. First. This delineation between normal CSR and abnormal CSR highlights the potential pitfall in the “one-size fits all” recommendation by CSR advocates such as Global Reporting Initiatives and Corporate Register that CEO should be rewarded for all CSR activities. 2003. the result suggests that the CEO is rewarded for undertaking normal CSR investment in firms that have strong corporate governance. Decomposing total CSR investment into a normal component and an abnormal component generates two interesting insights. Instead. Extending the prior literature. 2006) to isolate normal CSR from abnormal CSR. Fourth. we find that CEO compensation is negatively associated with total CSR investment. We draw on the prior literature on the determinants of CSR (Johnson and Greening. However. Thus. 2004). we find that CEO compensation is not associated with total CSR. our results can potentially explain the prior puzzling finding in Coombs and Gilley (2005) and Cai et al. Our paper makes four contributions to the literature. the negative association between CEO compensation and CSR is more pronounced in firms with stronger corporate governance. 2003). First. Third. 1994). (2003) argue that such an extreme optimization perspective that fails to acknowledge the possibility of any off equilibrium behavior is perhaps unrealistic. in the context of CSR investments. K. by providing evidence on the association between CEO compensation and CSR investment. 1999. we suggest that normal CSR reflects the optimal level of CSR investment that potentially increase shareholders’ value and that the abnormal CSR reflects excessive investment in CSR that potentially reduce shareholders’ value (Fazzari et al. of Multi.. Ittner and Larcker (2001) and Ittner et al.. we are able to assess whether the abnormal CSR is associated with CEO compensation. In contrast. We show that the incremental effect of CSR investment (over and above traditional financial performance measures such as operating profitability and stock returns) on CEO compensation. this result suggests that CEO is rewarded for investing in optimal level of CSR. we find that CEO compensation is positively associated with normal CSR investment. More generally. our results broadly support the findings in prior studies that compensation committee influence the CEO compensation setting process to promote optimal contracting incentives (Adut et al. we find that CEO compensation is negatively associated with abnormal CSR investment in firms with strong corporate governance. which suggests that when CSR investment deviates from its optimal level. Hubbard. Hence.. Karpoff et al. 2005. but a cross-sectional sample will consist of firms that are distributed around the optimal choice. and/or (2) managers perceive a personal benefit from the investment. Second. Borghesi et al. we find CEO compensation level is negatively associated with abnormal CSR. In firms with strong corporate governance. 1998. Next. we examine the effect of corporate governance on the association between CEO compensation and CSR. Dechow et al.M. we find that CEO compensation level is positively associated with normal CSR. to the extent that normal CSR reflect optimal level of CSR investment. Hence managers might undertake CSR investments due to their career concerns. in firms with weak corporate governance.-W.

17 8. Waddock Table 1 Sample.2. Table 1 describes the sample distribution over years. Manag. Year Number of firm-years 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 138 286 302 291 308 312 321 320 313 458 493 906 933 924 957 1036 1022 1080 1079 1028 Total 12. (2) observations in which the current CEO has served the company for strictly less than two consecutive years..507 Percentage (%) 1.64 8. 1997. Data and research design 2. 2. .507 firm-years for 1680 firms for the period 1992–2011. (3) firms in the regulated industries (SIC code 4900–4999) or in the financial industry (SIC code 6000–6999).94 7. We drop the following observations in the screening procedures to obtain our sample: (1) observations with CEO turnover during the year. The final sample consists of 12.g.57 2. The rest of the paper is organized as follows.46 2. 1997). with foreign sales on average being almost 35% of total sales. Section 4 concludes. Finally. There was a significant increase in the number of observations per year in and after 2003.1. Section 2 describes the data and research design. and (4) observations with zero CEO compensation in the year. covering not only MSCI KLD 400 Social Index but also the 3000 largest US companies. Jian. while in earlier years it covered only the 1000 largest US firms.49 2. Our primary source of corporate governance data is the Risk Metrics database.5 3. In this paper we document systematic differences between normal CSR and abnormal CSR in affecting CEO compensation. Waddock and Graves. This is mainly due to the fact that KLD more than doubled its coverage in 2003. Section 3 presents our results. Turban and Greening.50 M.29 2.22 100 This table presents the sample distribution over the sample period from 1992 through 2011.28 8.39 7.33 2. Lydenberg and Domini (KLD) Database.24 7.41 2.56 2. our paper contributes to the financial management of multinational firms because our sample firms have extensive foreign operations.66 3.1 2. K.65 8.-W. Sample formation We obtain CEO compensation data from Execucomp. We obtain CSR data from the Kinder. 1999.63 8. Fin.46 7. Lee / J. Furthermore. 29 (2015) 46–65 CEO compensation is negatively associated with total CSR. 2. of Multi. Szwajkowski and Figlewicz. Measuring CSR KLD data have been used extensively in scholarly research to operationalize the CSR construct (e. our results suggest that the association between abnormal CSR and CEO compensation is conditioned on corporate governance structure. Financial accounting information is from the Compustat and stock return data is from CRSP.

we predict ˇ1 to be positive. employee relations.3. We include the following control variables.. We control for firm size with the natural logarithm of total assets (FIRMSIZE). human rights and product. Chatterji et al.3. we predict ˇ1 to be negative. stock options granted. YEAR = Dummy variables to control for year fixed effects. Corporate governance is perceived as a distinct construct from CSR and its impact on CEO compensation is widely examined in the prior literature (e. employee relations.. (2009) contend that KLD’s social ratings are among the most influential and the most widely accepted CSR measure used by academics. 1992). environment.. BDINDEP = percentage of independent directors on the board. following prior studies (Chatterji et al. In order to disentangle the effect of CSR and corporate governance. Lee / J. Our proxies for firm performance are return on assets (ROA) and stock return in the fiscal year (RETURN). Fin. We control . CSR = KLD strengths less KLD concerns for community.-W. Core et al. bonus. Manag.g. Past studies (Rosen. Smith and Watts. we employ the following model to test the association between CEO compensation and CSR: CEO compensation = ˇ0 + ˇ1 × CSR + ˇ2 × FIRMSIZE + ˇ3 × ROA + ˇ4 × RETURN + ˇ5 × VOLAROA + ˇ6 × VOLARET + ˇ7 × MTB + ˇ8 × TENURE + ˇ9 × AGE + ˇ10 × BDINDEP + ˇ11 × BDOWN + ˇ12 × INSTI + INDUSTRY + YEAR (1) where CEO compensation = Natural logarithm of the sum of one and total CEO compensation level comprising salary. FIRMSIZE = Natural logarithm of total assets ROA = Operating income divided by total assets RETURN = Stock return in the fiscal year VOLAROA = ROA volatility in the past 5 years VOLARET = Stock Return volatility in the past 5 years MTB = Market value of equity divided by book equity TENURE = Tenure of CEO in the fiscal year. diversity. 2. 1999. long term incentive payouts and other annual compensation in the fiscal year. Waddock and Graves. restricted stocks granted. INDUSTRY = Dummy variables to control for industry fixed effects at the 2-digit SIC level. Core et al. Empirical model 2. we construct CSR. 1982. environment. K. measured as total strengths minus total concerns in KLD’s six social rating categories: community. excluding corporate governance. Mattingly and Berman (2006) assert that the KLD dataset has become the standard for quantitative measurement of corporate social actions. Under the value destruction hypothesis. KLD evaluates CSR on seven main dimensions including community. BDOWN = percentage of common stock owned by all directors. human rights and product. we construct the CSR measure based on the six remaining dimensions. diversity. AGE = Age of CEO in the fiscal year.. 2009. human rights and product. environment. 29 (2015) 46–65 51 (2003) argues that the KLD data are “the de facto research standard” for measuring CSR in scholarly research. employee relations. High growth firms are more complex to manage compared to low growth firms (Smith and Watts. 2008. Johnson and Greening. 1992) find that large firms are more complex and they demand managers with more equilibrium wages. 1997). Independent directors are directors who are neither current nor former employees of the firm. 1999). corporate governance. Specifically. 1999). Under the value creation hypothesis. of Multi. Jian. (1999) argue that CEO compensation level is positively associated with firm performance. CEO compensation and CSR Following prior studies on the determinants of CEO compensation level (Core et al.M. INSTI = percentage of common stock held by institutional shareholders.1. diversity.

Following this logic. Lee et al. (2003). Such an extreme optimization perspective is perhaps unrealistic as it fails to acknowledge the possibility of any off equilibrium behavior (Ittner and Larcker. Lee. we are able to assess whether the abnormal CSR is associated with CEO compensation. Instead. Manag. there are many legitimate reasons to expect firm policies and managerial decision to deviate from their optimal levels. while a cross-sectional sample will consist of firms that are distributed around the optimal choice. 2001. . 1985. Jian. 2001). Wu. Ittner and Larcker. Potential reasons include changes in firm characteristics and manager characteristics (Core and Guay. 1999.. Ittner et al.3. 1992). (2014) to motivate our discussion on the decomposition of total CSR into normal CSR and abnormal CSR. Hence.-W. We draw on the theoretical insights provided by Demsetz and Lehn (1985). K. we follow the insights from Hanlon et al. We refer to the first component as the “normal CSR”. We control for uncertainty in operation with two proxies: standard deviation of return on assets in the past five years (VOLAROA) and standard deviation of stock returns in the past five years (VOLAROA). 2014) . Thus. employee relations. Ittner et al. we determine the optimal CSR and deviation for each firm by estimating the following model: CSR = ˛0 + ˛1 × ATO + ˛2 × PM + ˛3 × CASH + ˛4 × CFO + ˛5 × LEVERAGE + ˛6 × MTB + ˛7 × FIRMSIZE + ˛8 × R&D + ˛9 × ADV + ˛10 × BDINDEP + ˛11 × BDOWN + ˛12 × INSTI + INDUSTRY+YEAR (2) where CSR = KLD strengths less KLD concerns for community. Milgrom and Roberts. As emphasized by Larcker (2003). firms and managers do exhibit sub-optimal decisions in reality. Specifically. (1999). (2003) and Borghesi et al. 2000. 29 (2015) 46–65 for the firm’s growth opportunities with the ratio of market value of common equity to book value of common equity (MTB). percentage of common stock owned by all directors (BDOWN) and percentage of common stock held by institutional shareholders (INSTI). human rights and product.2. of Multi. Jian and Lee (2011) and Lee and Lee (2014). a deviation in the amount of CSR investment from this level is suboptimal. Under this approach. 1999) and changes in legal and other institutional environment that shift the optimal level. Ittner and Larcker (2001) and Ittner et al. any statistically significant association found between CEO compensation and abnormal CSR should occur only when there is measurement error or an inadequate set of controls. 2003). Following prior literature we decompose total CSR investment into two components: (a) the component that can be explained by investment based factors and (b) the component that is unrelated to investment based factors. Firms operating in more volatile environment are typically riskier. 2.52 M. we draw on prior literature on the determinants of CSR which posits that based on the firm’s operating characteristics and industry factors. McWilliams and Siegel. 2005. Normal CSR and abnormal CSR To further distinguish between value creation hypothesis and value destruction hypothesis. Fin. although firms continuously strive to optimize their corporate financial policies. and the latter as the “abnormal CSR”. 1989. 2001. there is an optimal level of CSR investment (Johnson and Greening. CEOs helming riskier should be compensated with higher compensation level (Banker and Datar. organizations adapt by experimentation and imitation (Ittner and Larcker.. diversity. We acknowledge that if one were to adopt an extreme optimization perspective that all firms in the sample are optimizing with respect to their CSR investments all the time. Ittner and Larcker (2001).. Lee / J. environment. there should be no statistically significant association between CEO compensation and abnormal CSR (Demsetz and Lehn. 2006). Karpoff et al. We also include industry dummy variables and year dummy variables to control for industry and time-series effects on CEO compensation. 2008. Following Core et al. (2003) and we posit that it is likely that all organizations are dynamically learning and moving toward the optimal level. to allow for the possibility of such dynamic learning toward the optimal choice. we also control for CEO characteristics such as CEO age in the fiscal year (AGE) and CEO tenure at the firm (TENURE). Moreover. We control for the effect of corporate governance on CEO compensation by including the percentage of independent directors on the board (BDINDEP). In other words.

percentage of common stock owned by all directors (BDOWN) and percentage of common stock held by institutional shareholders (INSTI). YEAR = Dummy variables to control for year fixed effects. CFO = Cash flow from operations divided by sales. 2006). Rather than including contemporaneous ROA. ADV = Advertising expenditure divided by sales.e. Lee / J. LEVERAGE = Total debt divided by total assets. 2013). Lastly. Leverage and market-to-book equity are included as stable firms with lower risk are more likely to invest in CSR (Cochran and Wood. BDOWN = percentage of common stock owned by all directors. Thus. We acknowledge that our paper identifies abnormal CSR based mainly on accounting and governance variables. we include various corporate governance attributes such as the percentage of independent directors on the board (BDINDEP). Stronger corporate governance is associated with greater effectiveness of CSR investment (Johnson and Greening.. (2) as a proxy for abnormal CSR (i. We take the fitted and residual values from equation (2). we include return on assets and cash flow from operations divided by sales. we include industry fixed effects and year fixed effects. as asset turnover and profit margin measure different aspects of profitability and are therefore likely to have different persistence (Nissim et al.. and (ii) CEO compensation level be negatively associated with abnormal CSR because CEO should be penalized for deviation from the optimal investments in CSR (i. the deviation from the optimal CSR). We use the fitted value of CSR investment from Eq. MTB = Market value of equity divided by book equity.. 1984. 2005) find that firms with higher intangibles have higher investments in CSR due to higher sensitivity of firm value to growth opportunities.. 2001). and test the association between CEO compensation and these components of CSR investment using the following specification: CEO compensation = 0 + 1 × NORMAL CSR + 2 × ABNORMAL CSR + CONTROLS (3) The value creation hypothesis predicts that CEO compensation level be positively associated with normal CSR and abnormal CSR. the level of CSR is likey to vary with the firm’s immediate environment (such as religion and politics). 29 (2015) 46–65 53 ATO = Sales over total assets. Prior studies (McWilliams and Siegel. Manag. 2000. Baumann-Pauly et al. 2005. the value destruction hypothesis. we split ROA into its constituent components: Asset Turnover (ATO) and Profit Margin (PM). predicts that (i) CEO compensation level be positively associated with normal CSR because CEO should be rewarded for optimal investments in CSR (i. To control for firm size.-W. of Multi. INDUSTRY = Dummy variables to control for industry fixed effects at the 2-digit SIC level. INSTI = percentage of common stock held by institutional shareholders. FIRMSIZE = Natural logarithm of total assets. Di Giuli and Kostovetsky (2014) find that firms have higher CSR when they are head-quartered in Democratic rather than Republican-leaning states. 1999). CASH = Cash divided by total assets. 2001).M. Drawing from previous literature that examines the major drivers of CSR investment.e. Given that firms do CSR to enhance stakeholder relations. In contrast. K. 2 < 0). . Jian.e. Thus. We address these issues in the robustness tests section. We control for intangibles by including advertising intensity (advertising expenditure divided by sales) and research and development intensity (research and development expenditure divided by sales). Fin. the value creation hypothesis implies that 1 > 0 and 2 > 0. 1 > 0). BDINDEP = percentage of independent directors on the board.. we include the natural logarithm of total assets because larger firms have greater resources for CSR investment (Wu. For example. (2) as a proxy for the normal (optimal) CSR investment and the residual from Eq. To control for the effect of firm performance on CSR. PM = Income before extraordinary items divided by sales. Orlitzky and Benjamin. we include the following variables in our model on the determinants of CSR. R&D = Research and development expenditure divided by sales. Wieser. We include cash as a percentage of total assets and leverage to proxy for financial flexibility because firms with more financial resources are more likely to invest in CSR (Karpoff et al.

PM is calculated as income before extraordinary items divided by sales.329) million. Manag. Independent directors are directors who are neither current nor former employees of the firm.384 1.546 0.6%. BDOWN is the percentage of common stock owned by all directors.056 0 0 Median 3.294 1.069 0.027 1.069 0. of Multi.280 7. 29 (2015) 46–65 Table 2 Descriptive statistics. Lee / J.011 This table presents summary statistics of the variables used in later analysis.027 25th Percentile 1. ATO is sales over total assets.647 0. The mean market to book value of common equity (MTB) is 1. RETURN is the firm’s gross stock return in the fiscal year.039 1. CASH is computed as cash divided by total assets.447 2.08 0. bonus. Mean CSR is 0.594 0.154 0. MTB is computed as the market value of equity divided by book equity of the firm. environment.384.058 0.019 20 60 82.91% 0. K.710.126 0. INSTI is the percentage of common stock held by institutional shareholders. Mean board independence (BDINDEP) is 68%.54 M.372 9 56 70.147 0. CEO compensation is the total CEO compensation level (million USD) comprising salary.106.552 0.705 firm-year observations from 1992 through 2011.105 0.52% 0. FIRMSIZE is the natural logarithm of total assets.039 and mean standard deviation of stock return in the past five years (VOLARET) is 0.103 0.5 Mean standard deviation of return on assets in the past five years (VOLAROA) is 0. employee relations.988 4 51 36.62% 1.072 0. Descriptive statistics Table 2 presents the descriptive statistics. Mean percentage of common stock owned by the institutional shareholders is 63%.158 0.834 0.015 0.655 0. R&D is calculated as the research and development expenditure divided by sales.149 0.297 6. VOLARET is the firm’s stock return volatility in the past 5 years.45 1 8. The mean buy-and-hold gross stock return during the fiscal year is 1.114 0. R&D is calculated as the research and development expenditure divided by sales.025 0. human rights and product. Several results are noteworthy.691 2.042 0.308 0.19% 0. Results 3.832 18.106 0.133 11.71 12.072 0.058 0. MTB is market value of equity divided by book equity.875 years.6 at the end of the year. First. total CEO compensation level is positively associated with CSR investment at the 5% 5 This implies that $100 invested at the beginning of the year will be worth $106.109 0.17% 63.63% 60.966 0. Mean CEO age is 56 years and the mean CEO tenure is 12.875 55.00% 1. TENURE represents the tenure of CEO in the fiscal year.066 0.681 0. BDINDEP is the percentage of independent directors on the board.-W.195 0. stock options granted.23 0.59% 27.309 1. Mean percentage of common stock owned by the board of directors (BDOWN) is 4%.012 9.2 0.455 0.12% 1.025 0.1.101 0.015 0. restricted stocks granted.13% 4.94% 71. VOLAROA measures the ROA volatility in the past 5 year.049 1.692 68.101 0. ADV is the advertising expenditure divided by sales.038 0. Variable Mean Standard deviation CEO Compensation (USD mil) CSR FIRMSIZE ROA VOLAROA RETURN VOLARET MTB TENURE AGE BDINDEP BDOWN INSTI ATO PM CASH CFO LEVERAGE R&D ADV 5.37% 2. generating a net return of 6. AGE denotes the age of CEO in the fiscal year.50% 2. diversity. On average.05 0. ROA is calculated as the operating income divided by total assets.066.062 0. FIRMSIZE is the natural logarithm of total assets.364 0.552 ($3. . CFO represents cash flow from operations divided by sales. long term incentive payouts and other annual compensation in the fiscal year. CSR is computed as the KLD strengths less KLD concerns for community.329 0 7. the sample firms are profitable with a mean return on assets (ROA) of 0. Jian.679 −1 6.00% 0. Mean (median) CEO total compensation is $5. ADV is the advertising expenditure divided by sales. Table 3 presents the Spearman correlation among selected variables.588 0. LEVERAGE is computed as total debt divided by total assets.280.72% 38. 3. Fin.202 0.406 0.268 1.105 0. Our sample consists of 12.005 0 75th Percentile 6.

VOLAROA measures the ROA volatility in the past 5 year.0169 0.1221* 1 0.0731* 0.0479* 1 −0. M.01 1 0.0121 −0.0954* 0. VOLARET is the firm’s stock return volatility in the past 5 years. CEO Compensation CSR FIRMSIZE ROA VOLAROA RETURN VOLARET MTB TENURE AGE BDINDEP BDOWN INSTI (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) 1 0. diversity.0393* 0.0729* 1 0.0535* 0.0634* −0.1098* 0.0198* −0.1625* −0. BDINDEP is the percentage of independent directors on the board. Fin.0381* −0.0336* −0.1002* −0.3268* −0. Our sample consists of 12. bonus.0711* −0.1616* 0.1673* −0.4005* 0.1352* −0. stock options granted.-W.0088 0.0531* −0.0830* 0. Lee / J. environment.0995* 0. which comprising salary.0014 1 0. RETURN is the firm’s gross stock return in the fiscal year.0839* −0.1028* −0. Manag. BDOWN is the percentage of common stock owned by all directors.0253* 1 0. MTB is computed as the market value of equity divided by book equity of the firm. of Multi.0725* −0.0201* 1 −0.2807* 1 0. CEO compensation (log) is the natural logarithm of the sum of one and total CEO compensation level.1096* 0. FIRMSIZE is the natural logarithm of total assets.1058* 0. TENURE represents the tenure of CEO in the fiscal year.0682* 0.0435* −0.1035* −0.0733* 0. employee relations.Table 3 Spearman correlations.0084 0.0115 0.0005 −0.0409* 1 0.705 firm-year observations from 1992 through 2011.0354* −0.0933* 0. long term incentive payouts and other annual compensation in the fiscal year. * denotes significance at 5% level. Independent directors are directors who are neither current nor former employees of the firm.0580* −0.1037* 1 0.0981* 0.6095* 0.7174* This table presents Spearman correlation between variables used in later analysis later. INSTI is the percentage of common stock held by institutional shareholders.3231* 0. 29 (2015) 46–65 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (1) 55 .0181 0. CSR is computed as the KLD strengths less KLD concerns for community.1719* −0.1415* 0.1256* 0.0427* 0. AGE denotes the age of CEO in the fiscal year. restricted stocks granted.0471* 0.6466* 0.0723* −0.2821* 0.0134 −0.0293* −0.1561* −0.2175* −0. Jian.1104* −0.0527* −0. human rights and product.0083 0. ROA is calculated as the operating income divided by total assets.0025 0.0219* 0.2523* 0.0375* −0.0716* −0. K.0315* 0.1399* −0.0035 1 0.1364* 0.1236* −0.

337*** (9. the estimated coefficient on CSR Table 4 Regression of CEO compensation on CSR. We conduct a formal multivariate analysis below where we control for these other important differences.001 (0.429) −0.052** (2.024*** (2.56 M. bonus. Standard errors are clustered by firm.319*** (13. diversity. CSR is negatively associated with volatility in profitability.096 (0. INSTI is the percentage of common stock held by institutional shareholders. environment. human rights and product. It is computed as the natural logarithm of the sum of one and total CEO compensation level. BDOWN is the percentage of common stock owned by all directors. MTB is computed as the market value of equity divided by book equity of the firm. ** and * indicate statistical significance at the 1%. directors’ stock ownership and institutional ownership.960) −0.673) 0. .042 (0. operating profitability and market-to-book ratio. 5% and 10% level.192) 0.710*** (10. we find that CSR is positively associated with firm size. In column (1).777) 0.718 −0. board independence. FIRMSIZE is the natural logarithm of total assets. Fin.838) 1. ***.464*** (32. long term incentive pay and other annual compensation. ROA is calculated as the operating income divided by total assets. restricted stocks granted. Manag.397) 0.261*** (11.904) 0.631) −0. Our sample consists of 12.311*** (11. TENURE represents the tenure of CEO in the fiscal year.370) 2. Jian.107*** (2.185** (2.021*** (2. respectively. Lee / J. long term incentive payouts and other annual compensation in the fiscal year. Regressions of CEO compensation on CSR Table 4 presents the regressions of CEO compensation on CSR. We caution that these simple correlations are univariate correlations that do not control for differences in other firm characteristics such as firm size. which comprising salary.087*** (4. Second. CEO age. CSR is computed as the KLD strengths less KLD concerns for community.259) 0.084*** (4.410) −0.827*** (10.974) 0. bonus. The dependent variable is CEO compensation. restricted stocks granted.301) 0.926) 0.405 (1.705 firm-year observations from 1992 through 2011. Third. CSR FIRMSIZE ROA VOLAROA RETURN VOLARET MTB TENURE AGE BDINDEP BDOWN INSTI (1) (2) −0.003 (1.012*** (6. Independent directors are directors who are neither current nor former employees of the firm.517) 0.325) Yes Yes 0. AGE denotes the age of CEO in the fiscal year. of Multi.108) GOVSTRENGTH Constant YEAR INDUSTRY Adjusted R2 4.747) 0.003** (2. volatility in stock return. VOLAROA measures the ROA volatility in the past 5 year. The dependent variable is CEO total compensation comprising salary. employee relations.029* (1.2. 29 (2015) 46–65 significance level.095) Yes Yes 0. K.473 This table presents the OLS regression results of CEO compensation on CSR.098** (1. BDINDEP is the percentage of independent directors on the board.299) 2. stock options granted. Coefficients are presented with t-statistics below in parentheses.851) 0.070) −0.917) −0. VOLARET is the firm’s stock return volatility in the past 5 years. 3.060*** (2. stock options granted. RETURN is the firm’s gross stock return in the fiscal year.-W.

CSR is negatively associated with corporate governance strength. First.M. profitability. the result is economically significant. we find CEO compensation level is negatively associated with abnormal CSR at the 1% significance level. In column (1) we include all firm characteristics in addition to industry and year fixed effects. Jian. Hence.7 3. we still find CEO total compensation is negatively associated with CSR investment. which suggests that CEO total compensation is negatively associated with CSR investment.6 Hence. Fin. We repeat the regressions reported in Table 4 but decompose CSR into normal and abnormal component using the model shown in Table 5 column (1). Regressions of CEO compensation on normal CSR and abnormal CSR In Table 6. In all specifications we find similar results. CEO compensation decreases by 4. and advertising divided by sales. In column (2). 3.. Wu. 6 We hold the control variables at their sample means. On the other hand. firm size. this result suggests that CEO is rewarded for investing in optimal level of CSR. stock return. 2005. For example. 7 . percentage of common stock owned by all directors (BDOWN) and percentage of common stock held by institutional shareholders (INSTI). firm’s operating risk and growth opportunities.17%. results are qualitatively consistent. Higher scores of GOVSTRENGTH denote higher corporate governance strength. Second. and corporate governance measures such as board independence. In other words. the estimated coefficient on CSR is −0. Karpoff et al. the results are economically significant. Consistent with prior studies (Johnson and Greening. board ownership and institutional ownership. of Multi. We conduct a number of robustness checks on the model. Based on the estimated coefficients model (1). the CEO’s total compensation decreases 2. In our next set of tests. Manag. This result is consistent with the value destruction hypothesis of CSR investment. we find that CSR is positively associated with operating cash flow. we construct a composite measure of corporate governance strength (GOVSTRENGTH) based on the principal components analysis of the percentage of independent directors on the board (BDINDEP).29%. K. After controlling for firm-level corporate governance strength. CEO is punished for excessive investments in CSR. Thus. CEO receive lower total compensation in firms with higher CSR investment. we use the fitted values of CSR based on estimated coefficients in Table 5 column (1) to compute the normal CSR (optimal level of CSR based on firm characteristics). if the firm increases its CSR from the 25th percentile to the 75th percentile.-W. (2). 2006). To the extent that normal CSR reflects the optimal level of CSR investment. 2000.024 (significant at the 1% level). we examine whether there are systematic differences between normal CSR and abnormal CSR in affecting CEO compensation. after controlling for standard economic determinants of CEO compensation such as firm size. The fitted and residual values for CSR investment from each of the other columns in Table 5 produce qualitatively similar results in subsequent analysis. we include all firm characteristics. we find CEO compensation level is positively associated with normal CSR at the 1% significance level. 1999. Determinants of CSR Table 5 presents the regression results of the determinants of CSR based on Eq. Lee / J. the residual values from the regression in column (1) Table 5 reflect the abnormal CSR (deviations from the optimal level of CSR). In column (3). 29 (2015) 46–65 57 is negative and significant at the 1% level. based on the estimated coefficients in model 4 of Table 6 and holding all other variables at their means. when abnormal CSR increases from the 25th percentile to the 75th percentile. In column (2). In column (2). McWilliams and Siegel. In general. the corporate governance measures as well as industry and year fixed effects. This result suggests that when CSR investment deviates from its optimal level. research and development divided by sales.4. percentage of common stock owned by all directors (BDOWN) and percentage of common stock held by institutional shareholders (INSTI).3. we use the composite index of corporate governance strength (GOVSTRENGTH) to replace the three governance measures: the percentage of independent directors on the board (BDINDEP).

The dependent variable is CSR. percentage of common stock owned by all directors (BDOWN) and percentage of common stock held by institutional shareholders (INSTI). employee relations.349) 0.807) −0. FIRMSIZE is the natural logarithm of total assets.525*** (4. ADV is the advertising expenditure divided by sales.-W.078*** (5. our results highlight the systematic differences between normal CSR and abnormal CSR in affecting CEO compensation.561) −3.492) 4.011*** (5. which is computed as the KLD strengths less KLD concerns for community.5. Manag.998) 0.053 (1.252) 2. Collectively. Lee / J.127 (1. Using the GOVSTRENGTH. We construct a composite measure of corporate governance strength (GOVSTRENGTH) based on the principal components analysis of the percentage of independent directors on the board (BDINDEP).209** (2.469*** (9.232 (0.286*** (2.441) 4. Fin.638) −0.492) −1. respectively.881) Yes Yes 0. diversity.184 (0. MTB is market value of equity divided by book equity.607) 8.427) 0.703) −0.359) 8. ATO PM CASH CFO LEVERAGE MTB FIRMSIZE R&D ADV (1) (2) (3) 0.885) −0. CFO represents cash flow from operations divided by sales. Does corporate governance affect the association between CEO compensation and CSR? In Table 7. environment. ATO is sales over total assets. we partition the observations into the sub-sample of firms with strong corporate governance and the sub-sample of .981) 0.099 (1.358 (1.454*** 0. BDOWN is the percentage of common stock owned by all directors.578) 0. Coefficients are presented with t-statistics below in parentheses. Standard errors are clustered by firm.714) 0.439) 9. (2011) that CEO compensation is negatively associated with total CSR.206) 2.061) −0. R&D is calculated as the research and development expenditure divided by sales.322) 0.508** (1.705 firm-year observations from 1992 through 2011.085*** (8.556*** (4. INSTI is the percentage of common stock held by institutional shareholders. LEVERAGE is computed as total debt divided by total assets. we examine the effect of corporate governance on the association between CEO compensation and CSR investment. PM is calculated as income before extraordinary items divided by sales.187 BDINDEP BDOWN INSTI GOVSTRENGTH Constant INDUSTRY YEAR Adjusted R2 (13. of Multi.042 (1. Our sample consists of 12. Independent directors are directors who are neither current nor former employees of the firm.179 −4.135) 0.375*** (8.417*** (8.58 M.535) Yes Yes 0.04 (0.309 (0.590) 0.405 (1. BDINDEP is the percentage of independent directors on the board. CASH is computed as cash divided by total assets. Jian.531) −0. ***.333) 2.599) 0.943) 0. 29 (2015) 46–65 Table 5 Determinants of CSR investment.310*** (4.134 (1. Higher scores of GOVSTRENGTH denote higher corporate governance strength.485*** (4. 5% and 10% level.336*** (4.272) 3.128 (0.492) 0. 3. ** and * indicate statistical significance at the 1%. K.393) Yes Yes 0.624) −5.194) 0.940*** (5.382*** (4.754*** (4.172** (1.226 This table presents the OLS regressions of the determinants of CSR. By separating normal CSR and abnormal CSR. our results can potentially explain the prior puzzling finding in Coombs and Gilley (2005) and Cai et al.529*** (7.074 (0.095 (0. human rights and product.

033* (1.462*** (69. .124*** (6.M. NORMAL CSR ABNORMAL CSR FIRMSIZE ROA VOLAROA RETURN VOLARET MTB (1) (2) (3) (4) 0. MTB is computed as the market value of equity divided by book equity of the firm.125*** (22.575) 0. TENURE represents the tenure of CEO in the fiscal year. (2009) entrenchment index (E-index) as an alternative measure of corporate governance.002) 0. RETURN is the firm’s gross stock return in the fiscal year.006*** (9. we employ Gompers et al.399*** (41.017** (2. Independent directors are directors who are neither current nor former employees of the firm.217) −0. In firms with strong corporate governance (column (1)).003*** (3.478) 0.108) −0.920*** (9.602*** (20.-W.010*** (3.85. we find that CEO compensation is not associated with CSR. VOLARET is the firm’s stock return volatility in the past 5 years.588) 0. BDOWN is the percentage of common stock owned by all directors.044*** (5. ROA is calculated as the operating income divided by total assets. we find that CEO compensation is negatively associated with CSR.113*** (6.799*** (8. In column (3). The dependent variable is CEO compensation.212*** (10.049** (2.947) 0.935) 0.987) 0.524 This table presents the OLS regression results of CEO compensation on normal and abnormal CSR. restricted stocks granted. Manag.252) 0. long term incentive payouts and other annual compensation in the fiscal year.209*** (10. K.012*** (3. CEO compensation is not associated with CSR. low G-score).020** (2.055** (2. INSTI is the percentage of common stock held by institutional shareholders.332) Yes Yes 0. VOLAROA measures the ROA volatility in the past 5 year.012*** (3. ABNORMAL CSR is the residual value of CSR from Table 5 model 4.076) 0.464*** (69.441) −0. stock options granted.731) 0. of Multi.754) −0.612) −0.006*** (9.517*** (2.346) 0.423) 0. 5% and 10% level.701) −0. CEO compensation is lower when total CSR is higher.412) 0.116*** (6.465) Yes Yes 0. CEO compensation is negatively associated with CSR.837*** (4. in firms with weak corporate governance (column (2)).128** (2.035) 4.762) 0.035 (1.003*** (3.019) −0.586*** (2. In contrast. bonus. Fin. we employ Bebchuk et al.527 TENURE AGE BDINDEP BDOWN INSTI Constant Year dummies Industry dummies Adjusted R2 3. ** and * indicate statistical significance at the 1%.522 3.525 −0.137) 0. in firms with strong corporate governance (i.143) 0.258) 0. Coefficients are presented with t-statistics below in parentheses. the results in column (4) indicate that in firms with weak corporate governance (i.171) 0. Specifically. Standard errors are clustered by firm. The Chi-square to test the difference in coefficient on CSR between strongly-governed firms and weakly-governed firms is 6.145*** (5.055*** (5. ***.587) Yes Yes 0.071) 0. Our sample consists of 12. Jian.201) 0.400*** (41.101) 0. In columns (3) and (4). respectively.379) 0. Lee / J. BDINDEP is the percentage of independent directors on the board.163*** (6.793*** (8.010*** (−3. This result suggests that in strongly-governed firms. which comprising salary.905*** (4. firms with weak corporate governance.872) −0. (2003) G-score as an alternative measure of corporate governance.e. In columns (5) and (6).333) 0. NORMAL CSR is the predicted value of CSR from Table 5 model 4.926*** (9. 29 (2015) 46–65 59 Table 6 Regression of CEO compensation on normal CSR and abnormal CSR.012) 0. AGE denotes the age of CEO in the fiscal year.702) 0.072*** (21.238) 0. However.057*** (5.146*** (6.033) 0.495) −0.164*** (6.593) 0.705 firm-year observations from 1992 through 2011. FIRMSIZE is the natural logarithm of total assets.135** (2. Results are qualitatively similar.047*** (6.561*** (19.e.127*** (7.733) 0.623) −0.513) −0.209) 4.412) Yes Yes 0. high G-score). It is computed as the natural logarithm of the sum of one and total CEO compensation level. significant at 1% level.

422) 0.205) 0.149*** (6.78 (0.954) 0.164) 3.306*** (10. AGE denotes the age of CEO in the fiscal year.439) Yes Yes −0.328*** (17.352) 2.349) 0. VOLARET is the firm’s stock return volatility in the past 5 years.514*** (66.85 Chi-square (0.008*** (9.041*** (4.233) 0. diversity.067*** (7. Standard errors are clustered by firm. G-score (column 3 and 4) and E-index (column 5 and 6) respectively.004*** (3. (2003). Lee / J.020*** (4. The dependent variable is CEO compensation.006 (1. VOLAROA measures the ROA volatility in the past 5 year.086*** (7.60 M. ***.688) 0.015 (0.277) 0.492) −0.494) 0.311) 0. The sample is partitioned into two subsamples according to the median of three corporate governance measures: GOVSTRENGTH (column 1 and 2).912) −0. In firms with strong corporate governance (column (1)).676) 0.891) 0.487 −0.906 −0. Fin.295) 0.465) Yes Yes 0.994) 0.124) −0.121*** (3.474) 0.045) 0. Our sample consists of 12.019** (2.691*** (5.18 (0.161*** (4. MTB is computed as the market value of equity divided by book equity of the firm. TENURE represents the tenure of CEO in the fiscal year.862) 1.105*** (4.228*** (15.701*** (11. ADV is the advertising expenditure divided by sales.515) 0. restricted stocks granted. Manag.816) Yes Yes 0.004*** (2.495 −0. Coefficients are presented with t-statistics below in parentheses. Thus.002 (1.002* (1.079*** (4.331) 0. human rights and product. in well-governed firms CEO total compensation is negatively associated abnormal .349 (1. FIRMSIZE is the natural logarithm of total assets.005) p value 8.-W.407) −0. Jian.007) This table presents the OLS regression results of CEO compensation on CSR in the sub-samples of strong and weak corporate governance.991) 2.088) 0.179*** (5.068) 0. In Table 8.080*** (3.810*** (14.236) 0.005 (1.003) 7.635) 0. On the other hand.844*** (5. employee relations.936) 0.001 (0.066*** (6. ROA is calculated as the operating income divided by total assets. environment.560) 1. RETURN is the firm’s gross stock return in the fiscal year.937) 1.835) 0.854) 1. we examine whether corporate governance affects the association between CEO compensation and normal (abnormal) CSR. the difference in coefficient on CSR between strongly-governed firms and weakly-governed firms is significant at 1% level.141 0.989) Yes Yes 0.003*** (3. long term incentive payouts and other annual compensation in the fiscal year. (2009).329) Yes Yes 0.077** (2.577) 0. which comprising salary.466*** (66.981) 0.010** (2.490) 0.321) 0. 29 (2015) 46–65 Table 7 Regression of CEO compensation on CSR: Strong Corporate Governance versus Weak Corporate Governance.879) 0.007*** (7. GOVSTRENGTH CSR FIRMSIZE ROA VOLAROA RETURN VOLARET MTB TENURE AGE Constant INDUSTRY YEAR Adjusted R2 G-score E-index Strong CG (1) Weak CG (2) Strong CG (3) Weak CG (4) Strong CG (5) Weak CG (6) −0.705 firm-year observations from 1992 through 2011.084*** (8. of Multi.275) 4. ** and * indicate statistical significance at the 1%.200*** (6.133*** (22.508) 0. in strongly-governed firms.328) Yes Yes 0. respectively.918*** (3.072 (1.378) 3.027) −0. It is computed as the natural logarithm of the sum of one and total CEO compensation level.135) 0. R&D is calculated as the research and development expenditure divided by sales.489*** (70.108 (0.508* (1.073 (0.224*** (8. GOVSTRENGTH is a corporate governance index derived from the principal components analysis of the board independence (BDINDEP). board ownership (BDOWN) and institutional investors ownership (INSTI).300) 0.003*** (3. CSR is computed as the KLD strengths less KLD concerns for community.753*** (14.812*** (2.489*** (3.038*** (3.476*** (61.745) 3.003** (2. 5% and 10% level.938*** (3. bonus. we partition the firms into the sub-sample of firms with strong corporate governance (column (1)) and the sub-sample of firms with weak corporate governance (column (2)).685*** (2. G-score is the G-score for corporate governance from Gompers et al. E-index is the corporate governance measure from Bebchuk et al. K.700) 1.560** (2.932*** (3.128) 0.614) −0.557 Test the difference in coefficients on CSR between two subsamples 6.004) 0.105*** (4.001* (1.566 −0. Using the composite corporate governance score (GOVSTRENGTH).375) 0.977) 0. we find that CEO total compensation is positively associated with normal CSR. the negative association between CEO compensation and total CSR is stronger.464) 0.023*** (4. stock options granted. suggesting CEO is rewarded for optimal level of CSR investment.064) 0.

***.391*** (15.016 (0.580*** (10.002* (1.797) 3.547) 0.099) 0.506 0.106*** (5.021) 0.965) Test the difference in coefficients on ABNORMAL CSR between two subsamples 8.907) 0.036*** (3.787*** (2. Standard errors are clustered by firm. In firms with weak corporate governance (column (2)).025) This table presents the OLS regression results of CEO compensation on normal and abnormal CSR in the sub-samples of strong and weak corporate governance. ROA is calculated as the operating income divided by total assets. Our sample consists of 12.217*** (8.747) −0.511) −0. Coefficients are presented with t-statistics below in parentheses.262) 0.317) 1.91 Chi-square (0.036) Yes Yes 0.667) 0.939) −0.442*** (48.003*** (3.003) 0.773*** (2. of Multi.020*** (5.362) 0.008*** (8.446*** (43.261) 0.008* (1.237) 0.518) Yes Yes 0.005) (0. long term incentive payouts and other annual compensation in the fiscal year.354) −0.105*** (6.375) −0.025*** (4. FIRMSIZE is the natural logarithm of total assets.857) 0.758) 0.032** (2.911*** (12. 5% and 10% level.490*** (48. ABNORMAL CSR is the residual value of CSR from Table 5 model 4.947) 0.018) 0.295) 1.009* (1.543) −0.317) 3.058*** (4.048) p value 0 (0.495 0.795) 0.731*** (5.277) 0.014 (1. suggesting CEO is rewarded for optimal level of CSR investment.406) 4.078*** (6.002 (1. Manag.005*** (3. (2009).672 7. More importantly. VOLAROA measures the ROA volatility in the past 5 year.110*** (4. there is no association between .070*** (4. G-score (column 3 and 4) and E-index (column 5 and 6) respectively.486) −0.406) 0. CSR. bonus.756) −0.003* (1. Our results underscore the importance of separating normal CSR and abnormal CSR in setting CEO compensation.008*** (9.569 0.406) 3.651) 1.807) 0.928) 0. The dependent variable is CEO compensation.733) 0. respectively.523 0. board ownership (BDOWN) and institutional investors ownership (INSTI).589) 0.498 0.159*** (4.002 (1.545) 0.029 (0.795*** (2.611) −0.003** (2.176*** (6. MTB is computed as the market value of equity divided by book equity of the firm.536) −0.114*** (14.086*** (3.082) 0. which comprising salary.910) 0.021* (1.220) Yes Yes 0. The sample is partitioned into two subsamples according to the median of three corporate governance measures: GOVSTRENGTH (column 1 and 2).057*** (3.140) 0.006) p value 5.422) 0.403) 0. (2003). NORMAL CSR is the predicted value of CSR from Table 5 model 4. G-score is the G-score for corporate governance from Gompers et al.823) 0.103*** (4.713) Yes Yes 0.036*** (4. RETURN is the firm’s gross stock return in the fiscal year.474*** (53.766*** (18. suggesting CEO is punished for excessive CSR investment. Lee / J.005 3. stock options granted.471) 0.518) 0.284) 0.688) 0. GOVSTRENGTH is a corporate governance index derived from the principal components analysis of the board independence (BDINDEP).56 Test the difference in coefficients on NORMAL CSR between two subsamples 0.029*** (7. we find that CEO total compensation is positively associated with normal CSR.705 firm-year observations from 1992 through 2011.283) 0.937) Yes Yes 0.707) 0.005*** (3. VOLARET is the firm’s stock return volatility in the past 5 years.669** (2.003 (0.428*** (2.148*** (6.726*** (8. It is computed as the natural logarithm of the sum of one and total CEO compensation level.001 (0.M.02 (0.303) 3.65 Chi-square (0.965) Yes Yes 0.955) 0.640*** (2.249) 0.451*** (21. Jian.080*** (7. E-index is the corporate governance measure from Bebchuk et al. K.118*** (3.671) 0.163) 2. Fin.194*** (5.257*** (4. AGE denotes the age of CEO in the fiscal year.172*** (5.820) (0. ** and * indicate statistical significance at the 1%. 29 (2015) 46–65 61 Table 8 Regression of CEO compensation on normal CSR and abnormal CSR: Strong Corporate Governance versus Weak Corporate Governance.727) 0.297) 0. restricted stocks granted.573*** (4. TENURE represents the tenure of CEO in the fiscal year. GOVSTRENGTH NORMAL CSR ABNORMAL CSR FIRMSIZE ROA VOLAROA RETURN VOLARET MTB TENURE AGE Constant INDUSTRY YEAR Adjusted R2 G-score E-index Strong CG (1) Weak CG (2) Strong CG (3) Weak CG (4) Strong CG (5) Weak CG (6) 0.439*** (46.096** (2. in firms with weak corporate governance.023*** (5.870*** (3.791) 0.-W.888*** (8.575) −0.

of Multi. 29 (2015) 46–65 CEO compensation and abnormal CSR. and (5) climate change. have no involvement in nuclear power. Taken together. The FTSE4Good series measures the performance of firms that meet social and environmental criteria in five categories: (1) environmental sustainability. Our main results on the association between CEO compensation and CSR are robust across alternative measures of “financial constraints.62 M.S. (3) countering bribery.6. significant at 1% level.6. The ranking is based on the ratio of the number . firms in the FTSE4Good Index with the U. (2003) G-score (column (3) and (4)) as an alternative measure of corporate governance to partition the sample. we use U. firms lend additional support to the value destruction view.S. Since FTSE4Good U..” In addition. normal CSR and abnormal CSR in affecting CEO compensation. Religion rank measures the religion ranking of the state in which the firm’s headquarters is located. firms in the FTSE4Good Index as an alternative sample of socially responsible firms. tobacco. leverage. To address the potential endogeneity problem. a firm must derive less than 2% of its gross revenue from the production of military weapons. 3. CEOs receive lower compensation when abnormal CSR is higher. and alcohol. After merging the U. listed firms. In order to be eligible for the DSI 400. Robustness tests 3.S. 2013). firms are determined independently from KLD firms. The Chi-square that tests the difference in coefficients on normal CSR in the two subsamples (strong versus weak corporate governance) is 0. In summary. Untabulated results suggest the CEO compensation is approximately 1% lower for FTSE4Good U.S. (4) supply chain labor standards. Endogeneity Although using an extensive list of control variables (in Eq. Manag. gambling.3.S. K.005 (insignificant).S firms) from the merged database of Execucomp and Compustat database using firm size. The FTSE4Good Index consists of 600–700 socially responsible firms around the world from 2001 to 2011.672. industry dummies and year dummies. Fin.e. the results from the regression could still suffer from endogeneity bias caused by unobservable omitted variables. firms than for nonFTSE4Good U. we also use an alternative measure of CSR. We obtain qualitatively similar results using Gompers et al. In another supplementary test.1. the results are qualitatively similar based on a balanced panel of firms for the sample period.S. market-to-book ratio. of which approximately 200 firms are U. This result suggests that in poorly monitored firms.S. our results suggest that it is important to recognize the interplay among corporate governance structures.6. firms.-W. as in McWilliams and Siegel (2000). which ranges between 1 and 50. we perform two-stage-least-squares (2SLS) regression analysis using religion rank and a blue state dummy as instrumental variables for the CSR investment (Deng et al. CEO is not punished for excessive investment in CSR.S. while the Chi-square that tests the difference in coefficients on abnormal CSR in the two subsamples (strong versus weak corporate governance) is 8. We employ several measures of “financial constraints” such as the Kaplan and Zingales (1997) measure. an indicator variable that takes a value of 1 if the firm is included in the DSI400 in a given year (for having passed the “social screen”). in firms with stronger corporate governance structures.S. CSR DSI400. Compustat. 3. we use a propensity score matching approach. firms compensate their CEOs differently from non-FTSE4Good U. nonFTSE4Good U. Our results are qualitatively similar. To examine whether FTSE4Good U. the Whited and Wu (2006) size–age measure. we have a sample with 170 US firms.6. Lee / J. and have a positive record in each of the remaining six categories. Financial constraints Another concern is that financially constrained firms have less resource to invest in CSR.2.S. firm size and dividends payout. (2) human rights. and CRSP. Our main inferences are also similar using Bebchuk et al. 3. (2009) entrenchment index (E-index). Jian. firms. and 0 otherwise. the results using FTSE4Good U. (1)) helps to reduce omitted variables bias in estimating the relation between a firm’s CSR investment and CEO compensation. Alternative measures of CSR In a sensitivity test. We choose matching firms (i. firms in the Execucomp Database.

respectively. 21. we find CEO compensation level is positively associated with normal corporate social responsibility. Rubin. K. Sensitivity. 78. CEOs receive lower compensation for excessive investments in CSR. It is unlikely. Wickert. We therefore expect this dummy variable to be highly correlated with our sample firms’ CSR. Consistent with the value destruction hypothesis.H. however.. A.wikipedia. J. J. In untabulated tests. To the extent that normal CSR reflects the optimal level of CSR investment. Barnea. L.9 Rubin (2008) finds that firms with high CSR ratings tend to be located in democratic or blue states.M. As a robustness test.. A. Account. The value creation (value destruction) hypothesis predicts a positive (negative) association between CEO compensation and CSR. An exploratory study of the impact of degree of religiousness upon an individual’s corporate social responsiveness orientation.. Strong corporate governance structure penalizes CEO more by reducing CEO compensation if CEOs over-invest in CSR. precision.-W. Rev. 22... 9 We obtain the list of blue states from http://en. Jian. satisfying the exclusion condition of instrumental variables. W. results (not tabulated) from 2SLS regression analyses indicate that our main inferences on the association between CEO compensation and CSR are qualitatively similar. Manag. However. 693–705. We define the state as a blue state if it is listed as the blue state in the website. Angelidis. Our results are qualitatively similar. Datar. 2009. Second. We use 2000 data since it covers the middle of our sample period (1992–2011). Account. . Corporate social responsibility as a conflict between shareholders. A. Conclusions We examine whether CEO compensation is associated with corporate social responsibility (CSR) investment. 2004. we redefine the blue state dummy in a certain year as an indicator that takes the value of one if a firm’s headquarters is located in a state in which the Democratic Party wins both previous and next presidential elections of that year.. What matters in corporate governance? Rev. we find that CEO total compensation level is negatively associated with CSR investment. 119–128.. J. 1989. Baumann-Pauly... Banker. L. 169. 2003. Cohen. First. Bus. Cready. Fin. Scherer. Financ. A.. of Multi. References Adut.. D. 8 The Association of Religion Data Archive provides information on religiosity every decade. R. Spence.org/wiki/Red states and blue states. Ethics 97. we find CEO compensation level is negatively associated with abnormal corporate social responsibility. 71–86. 27. Bebchuk. T. Organizing corporate social responsibility in small and large firms: size matters. Bus. that the choice of locating in a blue or red state could has a direct significant effect on CEO compensation except via its effect on CSR. Blue state is a dummy variable that equals one if a firm’s headquarters is located in a blue/democratic state and zero otherwise. Angelidis and Ibrahim (2004) find that the degree of religiousness is positively correlated with attitudes toward CSR. Lopez. this result suggests that CEO is rewarded for investing in optimal level of CSR.D. we find that the negative association between CEO compensation and CSR is more pronounced than in firms with weak corporate governance. we recalculate religion ranks for the periods 1992–1999 and 2000–2007 as the average religion rank based on 1990 and 2000 data and the average religion rank based on 2000 and 2010 data.. Stud.. Ethics 51. Ethics 115.. 2010. Restructuring charges and CEO cash compensation: a reexamination. This result suggests that when CSR investment deviates from its optimal level. 4. J.. Using religion rank and a blue state dummy as instrumental variables for the CSR investment. In firms with strong corporate governance. thus satisfying the relevance requirement of instrumental variables.. A. N.J. Res. D.M. Lee / J.8 A higher ranking indicates more religiosity. Ibrahim. Decomposing total CSR investment into a normal component and an abnormal component generates two interesting insights. and linear aggregation of signals for performance evaluation. C. Bus. Our results are qualitatively similar. S. to the extent that the construction of the religion rank variable is based on the state in which a firm is located. 2013. it is unlikely that this variable has a significant effect on the CEO compensation. Ferrell. J. 783–827. We also document that the positive association between CEO compensation and normal CSR is more pronounced in firms with stronger corporate governance. 29 (2015) 46–65 63 of religious adherents in the firm’s state to the total population in that state in 2000. This finding suggests that the religion rank variable is likely to be positively correlated with a firm’s CSR.

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