Corporate Social Responsibility and CEO Compensation Structure · Corporate Social Responsibility...

a Manning School of Business, 1 University Avenue, University of Massachusetts Lowell, Lowell, MA 01854, Tel:

+1.978.934.2831, email: [email protected].

b Corresponding author. Tel: +1.978.934.2520, email: [email protected].

c Tel: +1.978.934.2403, email: [email protected].

Corporate Social Responsibility and CEO Compensation Structure

Khondkar Karima

Manning School of Business, University of Massachusetts Lowell

Eunju Leeb


Sanghyun Suhc


June 2015

Abstract

We examine how a firm's corporate social responsibility (CSR) performance affects the structure

of CEO compensation. Traditional agency theory suggests that CEOs actively engage in CSR for

their own interests at the expense of shareholders, and our finding of a positive association

between a firm's CSR performance and CEO total compensation seems to support this argument.

However, a more detailed investigation reveals that the proportion of equity-based compensation

is relatively high for socially responsible firms, whereas the proportion of cash-based

compensation is relatively low. This suggests that a firm's social performance improves the CEO

compensation structure in a way to motivate managers to maximize shareholders' values in the

long run. The positive association between CSR and the proportion of equity-based

compensation is more pronounced in certain CSR categories such as employee relations, and the

main results are driven by the post-SOX period. Overall, our results highlight the positive impact

of CSR performance on the design of the CEO compensation package.

Keywords: Corporate Social Responsibility (CSR), CEO compensation, CEO compensation structure,

equity-based compensation, cash-based compensation

Corporate Social Responsibility and CEO Compensation Structure

Abstract

We examine how a firm's corporate social responsibility (CSR) performance affects the structure

of CEO compensation. Traditional agency theory suggests that CEOs actively engage in CSR for

their own interests at the expense of shareholders, and our finding of a positive association

between a firm's CSR performance and CEO total compensation seems to support this argument.

However, a more detailed investigation reveals that the proportion of equity-based compensation

is relatively high for socially responsible firms, whereas the proportion of cash-based

compensation is relatively low. This suggests that a firm's social performance improves the CEO

compensation structure in a way to motivate managers to maximize shareholders' values in the

long run. The positive association between CSR and the proportion of equity-based

compensation is more pronounced in certain CSR categories such as employee relations, and the

main results are driven by the post-SOX period. Overall, our results highlight the positive impact

of CSR performance on the design of the CEO compensation package.

1

1. Introduction

Prior literature shows that corporate social responsibility (CSR) has great impact on various

aspects of accounting and finance. These studies show that a firm's CSR activity improves

operating and financial performance (McGuire et al. 1988; Waddock and Graves 1997; Hillman

and Keim 2001; Jiao 2010), reduces the cost of capital (Sharfman and Fernando 2008; El Ghoul

et al. 2011), and increases stock price (Shane and Spicer 1983; Hamilton 1995; Karpoff et al.

2005). It is also found that firms engaging in CSR are less likely to manage their earnings (Kim

et al. 2012). On the other hand, a few studies do not find evidence on the effect of CSR on firm

performance. Nelling and Webb (2009) find no evidence of the positive impact of CSR on firms'

performance, and Brammer et al. (2006) show that socially responsible firms tend to have lower

returns.

The effect of CSR activity has also been investigated in the field of corporate governance. Some

recent studies examine the association between CSR performance and CEO compensation, and

this issue has been studied in two ways. One strand of this literature investigates the impact of

CEO compensation on CSR. These studies examine if executive incentives play an important

role in firms' engagement in CSR activity, and they find mixed evidence. McGuire et al. (2003)

find that high levels of CEO compensation lead to poor CSR performance. They argue that

performance pressures driven by such incentives make CEOs more focused on short-term targets,

preventing them from engaging in CSR activities.1 Mahoney and Thorn (2006) claim that

executive compensation structure is an important factor in explaining firms' CSR performance,

finding a negative effect of salary on CSR and a positive effect of stock options on CSR.

The other literature examines the impact of CSR on CEO compensation. Classic agency theory

introduced by Jensen and Meckling (1976) argues that CEOs tend to pursue their own interests

rather than to maximize shareholders' value. This supports managers' tendencies to invest in CSR

for the purpose of hiding their wrongdoings such as corporate misconduct (Hemingway and

Maclagan 2004). In the same vein, CSR can be used as a tool for CEOs to increase their own

benefits such as increasing reputation and strengthening bargaining power, leading to

overinvestment in CSR activities (Milbourn 2003; Barnea and Rubin 2010). This story suggests a

1 Agency theory suggests that CEOs may use CSR activities to pursue their own interests. In this respect, the

negative impact of CEO compensation on CSR performance could suggest that highly (poorly) paid CEOs are less

(more) motivated to improve firms' social performance for their own benefits.

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positive association between CSR and CEO compensation. That is, firms with high CSR

performance are expected to pay high levels of CEO compensation.

On the other hand, CSR can be negatively associated with CEO compensation. CEOs of socially

responsible firms may tend to receive less compensation for various reasons. First, their strong

performance in CSR makes them proud of being "an exemplary CEO" and internally rewarded

by doing the right thing. In this case, CEOs of high CSR firms are willing to trade their financial

benefits for such satisfaction (Potts 2006; Rekker et al. 2014). Second, low levels of CEO

compensation could be the natural consequence of a firm's CSR activity, because socially

responsible firms may reduce the compensation gap between CEOs and other employees to

resolve conflicts between managers and other stakeholders (Cai et al. 2011).

We extend the above studies by investigating the relation between CSR performance and CEO

compensation structure. In particular, we shed light on the effect of a firm's social performance

on the composition of the CEO compensation package. The CEO compensation structure,

measured by the proportions of cash- and equity-based compensation over total compensation in

this study, is a crucial factor in inducing executives to take on riskier investments and pursue

long-term profits in alignment with the interests of shareholders. Given this, the relation between

CSR performance and the components of CEO compensation can be interpreted in several ways.

First, the impact of CSR on the composition of CEO compensation suggests the types of

compensation packages preferred by CEOs who work for firms with different levels of CSR

activities. For instance, if CEOs are entrenched enough to be involved in CSR activities to

pursue their own interests, they may prefer cash-based compensation based on short-term

performance rather than incentive-based compensation. In contrast, if CEOs are willing to

sacrifice their financial compensation for doing the right thing, such confidence may make them

receive more equity-based compensation based on long-run performance. If a negative

association between CSR performance on CEO compensation is led by a firm's effort to improve

its relations with employees and shareholders, low levels of CEO total compensation for socially

responsible firms will be more likely to be driven by a lower proportion of cash-based

compensation. While prior studies primarily focus on interpreting the relation between CSR and

overall levels of CEO compensation from the perspective of agency theory, we consider all the

possibilities of how the relation differs depending on the components of compensation.

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Second, the association between CSR performance and CEO compensation implies how different

levels of firms' CSR activities affect the board of directors' decision to design the compensation

package. Optimal contracting theory argues that the ideal structure of the CEO compensation

package from the perspective of the board of directors would be the one that motivates CEOs to

align their interests with the interests of firm shareholders (Core and Guay 1999; Fama and

Jensen 1983; Jensen and Meckling 1976; Murphy 1985). In this sense, our results will answer the

research question of whether a firm’s social performance leads to the right mix in the

compensation package to improve firm value or act as an impediment to mitigating the agency

problem.

Third, the relation between CSR and CEOs' cash-based or equity-based compensation provides

insights into its impact on firm value. Even though CSR performance influences CEO

compensation, its impact on firm value may vary depending on the structure of the compensation.

If CEOs strategically use CSR performance for their own interests, as suggested by Barnea and

Rubin (2010), and it leads to increasing cash-based compensation based on short-term

performance targets, agency problems will be amplified, resulting in decreases in firm value. On

the contrary, if the compensation structure becomes more incentive-based with a firm's CSR

activity, increases in CEO compensation with CSR performance will reduce agency problems by

aligning CEO incentives with shareholders' interests and increase firm value in the long run. We

revisit this issue by investigating if CEOs' active engagement in CSR affects the composition of

the compensation package in a way that reduces or increases firm value.

Before we analyze the effect of a firm's CSR performance on CEO compensation structure, we

first examine if firms' disclosure of CSR information affects CEO compensation and its

components. We find that firms releasing their CSR information tend to have higher levels of

CEO total compensation compared to firms without CSR information. This suggests that CSR

disclosure improves the quality of CEOs by motivating CEOs to work harder to earn more

compensation. Meanwhile, this result turns out to be different when we look into the components

of CEO compensation, and, in particular, the proportion of cash-based compensation is lower for

firms with CSR disclosures. The results show that firms' CSR disclosures affect CEO total

compensation and its structure in a way that provides CEOs incentives to pursue shareholders'

interests.

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When we investigate the association between CSR performance and CEO total compensation,

we find that firms with high CSR performance tend to pay CEOs more in total compared to firms

with low CSR performance. The results seem to be consistent with Jensen and Meckling (1976),

suggesting that CEOs tend to improve firms' social performance to pursue their own interests.

However, further analysis on CSR performance and compensation components shows that such

high levels of total compensation for high CSR firms are mainly composed of equity-based

compensation.

Socially responsible firms tend to have a relatively low proportion of cash-based compensation

and a high proportion of equity-based compensation, while socially irresponsible firms have a

relatively high proportion of cash-based compensation and a low proportion of equity-based

compensation. This provides evidence against CEOs' self-interested behavior of using CSR for

their own interests, because a firm's CSR performance affects the structure of CEO

compensation in the direction of mitigating the agency problem and motivating managers to

maximize shareholders' value. It also shows that, even if high levels of CEO compensation for

socially responsible firms are attributed to CEO entrenchment, changes in the compensation

structure will end up attenuating agency problems.

The results are more or less pronounced depending on certain dimensions of CSR and the

passage of the Sarbanes-Oxley Act of 2002 (SOX). While the negative relation between CSR

and the proportion of cash-based compensation is more pronounced in CSR areas of environment

and human rights, the positive relation between CSR and the proportion of equity-based

compensation is more pronounced in CSR areas of environment, diversity and employee

relations. It is also found that these results are primarily driven by the post-SOX period.

Overall, our results indicate that the boards of directors of high CSR firms are more likely to

design the structure of CEO compensation to align managers' interests with those of shareholders.

These findings are consistent with Haugen and Senbet (1981) and Agrawal and Mandelker

(1987), who argue that equity-based compensation, such as restricted stocks and stock options,

plays an important role in inducing managers to increase shareholders' value and, thus reduces

agency problems.

This is the first study to examine the effect of firms' CSR activities on CEO compensation

structure with a focus on the intensity of each compensation component. While prior studies

investigate on CEO total compensation or the levels of the compensation components, our study

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on the proportions of cash- and equity-based compensation draws clearer implications on the

impact of CSR on the structure of CEO compensation. In addition, our results imply the

extensive future use of CSR information among stakeholders and investors, because a firm's

CSR performance is not only an indicator of its financial and operating performance but also a

measure of the degree of efficiency of a firm's corporate governance system. Outside investors

can extract information about a firm's corporate governance from its social performance.

The remainder of this paper is organized as follows. Section 2 reviews relevant literature and

explains the hypotheses that will be tested, and Section 3 describes data and methodology. In

Section 4, we discuss our empirical results of the effect of CSR on CEO compensation structure,

and Section 5 addresses additional tests including robustness checks. Finally, Section 6

summarizes and concludes the paper.

2. Related Literature and Hypothesis Development

Our main focus is on how a firm's social performance affects CEO compensation. When it comes

to testing this, we presume that such relation may vary depending on the components of CEO

compensation. Given this conjecture, we analyze three dimensions of CEO compensation: total

compensation, the proportion of cash-based compensation, and the proportion of equity-based

compensation.

The effect of CSR on CEO total compensation is anticipated in two ways. A firm's good

performance in CSR makes CEOs confident about doing the right thing. Thus, CEOs will be

internally rewarded by firms' CSR activities, which leads to relatively low levels of total

compensation (Potts 2006; Rekker et al. 2014). Alternatively, lower levels of CEO compensation

can be interpreted as the product of a firm's attempt to improve its relations with employees.

On the contrary, CEOs may intend to exploit firms' social performance for their own benefits

(Milbourn 2003; Barnea and Rubin 2010). In this case, they will attempt to increase their

reputation and obtain more bargaining power by improving firms' CSR performance. Such

opportunistic behavior will ultimately lead to high levels of CEO total compensation. Given all

these possibilities for the relation between a firm's CSR performance and CEO total

compensation, we propose the following hypothesis:

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H1. A firm's CSR performance is significantly associated with CEO total compensation.

We also expect that a firm's CSR performance will affect the structure of CEO compensation. A

firm's good CSR performance indicates that the firm is good at harmonizing different interests

among stakeholders and attempts to improve its relation with employees. Given this, socially

responsible firms are likely to have a higher proportion of equity-based compensation structure

than socially irresponsible firms. Linking this with a negative relation between CSR performance

and CEO total compensation, we predict that the negative association between CSR and total

compensation will be driven by decreases in the proportion of cash-based compensation.

In a traditional agency setting, CEOs prefer a less risky compensation structure with greater

cash-based compensation rather than equity compensation based on long-term performance

(Harris and Raviv, 1979; Westphal 1998). If CEOs overinvest in CSR activities to increase their

own benefits and their entrenched behavior leads to high levels of total compensation, the

positive relation between CSR performance and total compensation is expected to be driven by a

relatively high proportion of cash-based compensation compared to the proportion of equity-

based compensation.2

Given these possible effects of firms' social performance on the

components of CEO compensation, we establish the following hypotheses:

H2. A firm's CSR performance is significantly associated with the proportion of cash-based

compensation.

H3. A firm's CSR performance is significantly associated with the proportion of equity-based

compensation.

3. Data and Methodology

3.1. Data description

2 This is somewhat consistent with managerial power theory, which explains the effects of CEO's power on the

setting of their compensation contracts (Bebchuk and Fried, 2003; Bebchuk and Fried 2004; Core, Holthausen and

Larcker 1999; Hartzell and Starks, 2003).

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We collect annual CSR data from the Kinder, Lydenberg, and Domini Stats database (KLD

STATS) for the period 1998-2012. KLD STATS includes social and environmental performance

of more than 3,000 listed companies, and the database contains the company ID (CUSIP), binary

indicators for strength and concern activities in thirteen CSR categories, and summary counts for

all the areas. The CSR rating criteria consist of strength and concern indicators for seven

qualitative issue areas and six controversial business issue areas. The seven major qualitative

issue areas include community, corporate governance, diversity, employee relations,

environment, human rights, and product, and the six controversial business issues are alcohol,

gambling, firearms, military, nuclear power, and tobacco.3

Using the KLD STATS dataset, we obtain several CSR measures used in our analysis. Our CSR

measures are based on six main categories, community, diversity, employee relations,

environment, human rights, and product.4 We first calculate total strength and total concern

scores separately by adding up strength and concern indicators across the six categories. After

that, we obtain net CSR scores for each data observation by calculating differences between

these total strength and concern scores. The net CSR score for each of the six CSR categories is

also used in the detailed analysis.

We collect CEO compensation data from ExecuComp for our sample period. The database

includes the details of CEO compensation such as salary, bonus, restricted stocks, stock options,

pensions, and other annual compensation. Based on this dataset, we calculate total compensation

as the sum of salary, bonus, total value of restricted stocks and stock options, long-term incentive

payouts, and all other compensation given for the fiscal year. We also calculate cash- and equity-

based compensation, which are the sum of salary and bonus and the sum of restricted stocks and

stock options granted respectively during the fiscal year. Using these level data, we calculate the

proportions of cash- and equity-based compensation, which are key compensation measures of

this study. Following Core et al. (1999), Leone et al. (2006), and Rekker et al. (2014), we control

for total number of directors, percentage of independent directors on board, and several CEO

characteristics, such as CEO ownership, duality, age, and tenure, since these variables possibly

affect CEO compensation and its structure.

3 The details of CSR categories and strength/concern items are described in Appendix 1.

4 We exclude CSR scores on corporate governance in this study, since its definition contains CEO compensation.

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We obtain financial statements data from COMPUSTAT and stock return data from CRSP.

Utilities and financial companies (SIC codes 4000-4999 and 6000-6999) are excluded from the

sample. A list of the variables and their definitions are reported in more detail in Appendix 2.

3.2. Descriptive statistics

Table 1 reports summary statistics for key variables in the entire sample. Panel A shows the

statistics of the CSR variables. The mean of the total CSR scores (TCSR) is positive (0.23),

which is consistent with Rekker et al. (2014) and Cai et al. (2011). The mean of CSR strength

scores (CSR_S) (1.92) is greater than the mean of CSR concern scores (CSR_C) (1.69). This

shows that firms disclosing their CSR information tend to have relatively good CSR performance.

In terms of each CSR category, the mean of net CSR scores is positive in community (COMM),

environment (ENV), and diversity (DIV), while the mean of net CSR scores is negative in

employee relations (ER), human rights (HR), and product (PROD).

Panels B and C report the statistics of compensation, CEO and firm characteristic variables. The

mean dollar amount of equity-based compensation (EQUITY) ($3.2 million) is much higher than

the mean dollar amount of cash-based compensation (CASH) ($1 million). Consistently, the

mean proportion of equity-based compensation (PEQUITY) (47.97%) is higher than the mean

proportion of cash-based compensation (PCASH) (32.6%). The statistics of the other

compensation and firm characteristic variables, such as board size (BSIZE), CEO ownership

(CEO_OWN), book-to-market (BM), and Tobin's Q (TOBINQ), are in general consistent with

the statistics shown in prior studies (Cai et al. 2011; Rekker et al. 2014).

[Insert Table 1 about here]

Table 2 reports Pearson correlations between CSR and compensation and CEO-specific variables.

The correlation between total CSR score and total compensation is significantly positive (0.17),

and this positive correlation is consistent when we look into levels of cash- and equity-based

compensation. This seems to support that CEOs use CSR activities as a tool for their private

interests. In this case, we predict that CEO entrenchment will also lead to a relatively high

proportion of cash-based compensation compared to the proportion of equity-based

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compensation. However, an examination on the proportions of the compensation components

leads to conflicting results. While the proportion of cash-based compensation is negatively

correlated with the total CSR score (-0.15), the proportion of equity-based compensation is

positively correlated with the total CSR score (0.15). This suggests that the positive correlation

between CSR performance and total compensation is primarily driven by the association between

CSR and equity-based compensation. That is, although the correlation between CSR and total

compensation seems to highlight CEOs' abuse of CSR activities, the detailed investigation of

CSR performance and compensation structure suggests that socially responsible firms tend to

have a relatively low proportion of cash-based compensation and a high proportion of equity-

based compensation.

Overall, the correlation results suggest that high CSR firms have compensation structures that

minimize CEOs' moral hazards and induce CEOs to maximize shareholders' values. Since these

findings are based on pairwise correlations between CSR and compensation variables in this

section, we analyze the relation between CSR and compensation in more detail using regressions

in Section 4.


4. Empirical Results

4.1. CSR disclosure and CEO compensation

Prior to our analysis on CSR performance and compensation structure, we examine if a firm's

disclosure of CSR information affects CEO total compensation and the proportions of cash- and

equity-based compensation. The release of firms' CSR information to the public reduces

information asymmetry. This is supported by Verrecchia (2001), who argues that a firm's

disclosure reduces information asymmetry. If this is the case, a firm's disclosure on CSR activity

enhances shareholders' role to monitor CEOs and leads the board of directors to gain more

bargaining power in determining CEO compensation. Therefore, CSR disclosures are expected

to be negatively associated with CEO compensation. In addition, given enhanced power of

10

shareholders and the board of directors driven by a firm's CSR disclosure, we expect that such

negative relation between CSR disclosure and CEO total compensation will be mainly driven by

decreases in the proportion of cash-based compensation based on short-term performance goals.

On the other hand, a firm's disclosure on its CSR activity can lead to an increase in CEO

compensation, since CSR information also reveals the overall quality of CEOs, resulting in

improvement in their quality in the long run. Therefore, such environment induces CEOs to work

harder to earn more compensation and bargaining power. This argument is in line with Hermalin

and Weisbach (2012), who argue that a firm's enhanced disclosure positively influences both

shareholders and CEOs through the corporate governance system, eventually leading to high

levels of CEO compensation. By this logic, a firm's CSR disclosure will lead to an increase in

CEO compensation. With respect to the structure of the compensation, we conjecture that the

positive association between a firm's CSR disclosure and CEO compensation is mainly driven by

increases in the proportion of equity-based compensation, since both shareholders and CEOs

benefit from a reduction in information asymmetry in this case.

In order to test this, we estimate the following regression model using a CSR disclosure indicator

as a predictor variable:

𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽 × 𝐶𝑆𝑅𝐷𝐼𝑆𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (1)

where 𝐶𝑂𝑀𝑃𝑖𝑡 is CEO total compensation ( 𝑇𝐶𝑂𝑀𝑃𝑖𝑡 ), the proportion of cash-based

compensation (𝑃𝐶𝐴𝑆𝐻𝑖𝑡 ), or the proportion of equity-based compensation for firm i in year t

(𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡 ), 𝐶𝑆𝑅𝐷𝐼𝑆𝑖𝑡−1 is a CSR disclosure indicator which is 1 if firm i has CSR scores in

year t-1 and 0 otherwise, and 𝜽 is a vector of lagged control variables including CEO and firm

characteristic variables.5 We run the above regression with year and industry fixed effects. Table

3 reports the regression results. When we use total compensation as a dependent variable, a

coefficient on the CSR disclosure indicator is significantly positive (0.126). This indicates that

firms with the disclosure of CSR information have high levels of CEO total compensation. As 5

The CEO characteristic variables include the logarithm of the number of directors on the board of

directors(𝐵𝑆𝐼𝑍𝐸), the percentage of outside directors on board (𝑃𝐼𝑁𝐷), ownership by CEOs (𝐶𝐸𝑂_𝑂𝑊𝑁), CEO

duality (𝐶𝐸𝑂_𝐷𝑈𝑅) , CEO age (𝐶𝐸𝑂_𝐴𝐺𝐸) , and CEO tenure (𝐶𝐸𝑂_𝑇𝐸𝑁 ). The firm characteristic variables

include the logarithm of sales (𝑆𝐴𝐿𝐸), book-to-market (𝐵𝑀), the return-on-assets ratio (𝑅𝑂𝐴), the Tobin's q ratio

(𝑇𝑂𝐵𝐼𝑁𝑄) , the leverage ratio (𝐿𝐸𝑉) , the liquidity ratio (𝐿𝐼𝑄) , firm age (𝐹𝐴𝐺𝐸) , market beta (𝐵𝐸𝑇𝐴) ,

aggregated returns for 12 months in years t-1 and t-2 (𝑅𝐸𝑇 and 𝐿𝐴𝐺𝑅𝐸𝑇) , and the standard deviation of

aggregated returns over 5 years (𝑆𝑇𝐷𝑅𝐸𝑇). The detailed descriptions are reported in Appendix 2.

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explained above, it demonstrates that the release of firms' CSR information motivates CEOs to

exert effort and improves their quality. This eventually leads both shareholders and CEOs to

benefit from firms' disclosures on their CSR activities.


Under this hypothesis, we expect that this positive association will be attributable to a high

proportion of equity-based compensation. In order to test this, we repeat the above regression

using two components of CEO compensation as dependent variables, which are the proportions

of cash- and equity-based compensation. Columns (2) and (3) report the regression results. The

result in Column (2) shows that a coefficient on the CSR disclosure indicator is significantly

negative (-0.085) when we use the proportion of cash-based compensation as a dependent

variable. On the contrary, the coefficient in Column (3) is positive (0.011) in the regression of

the proportion of equity-based compensation, but is not statistically significant.

The results show that the positive association between CSR disclosure and total compensation

does not hold when we examine the relation between CSR disclosure and the compensation

components. Although the proportion of equity-based compensation is not significantly

positively associated with CSR disclosure, the proportion of cash-based compensation

significantly decreases with CSR disclosure. Given that cash-based compensation is based on

short-term profits and its high levels can cause agency problems, our results imply that a firm's

CSR disclosure does not affect its compensation structure in a way that amplifies the agency

problem and reduces firm value.

Overall, our results on a firm's CSR disclosure and CEO compensation highlight the positive

impact of CSR disclosure on CEO compensation and its structure. A firm's disclosure on its CSR

activity is positively correlated with CEO total compensation and is negatively correlated with

cash-based compensation. These results suggest that a closer look into the proportion of each

compensation component can offer insightful implications on the impact of a firm's CSR

disclosure on CEO compensation. In the next section, we further investigate the impact of CSR

performance on CEO compensation and its structure.

4.2. CSR performance and CEO compensation structure

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We simply considered a firm's CSR disclosure rather than the degree of CSR performance in the

previous section. However, investigating the effect of CSR performance on CEO compensation

could lead to different results. Motivated by this, we examine how a firm's CSR performance is

associated with total levels and each component of CEO compensation in this section.

CSR is a combined measure of a firm's ethical consciousness for the communities and

environment and its relationship with stakeholders such as employees, customers, and suppliers.

Thus, a firm's high CSR score verifies its superior ability to manage relations with stakeholders.

Some prior studies show that firms with good CSR performance tend to have lower levels of

CEO compensation as part of their efforts to improve the relation with employees. In addition,

CEOs of such a firm can be internally compensated for doing the right thing, which makes them

accept relatively low levels of pay. Taken together, a negative relation between CSR

performance and CEO total compensation is anticipated in this case.

However, if CEOs actively engage in CSR activities for the purpose of increasing their

reputation and strengthening their bargaining power, CEO compensation will increase with CSR

performance. According to this story, we cannot rule out the possibility that CSR performance is

positively associated with CEO compensation.

We also conjecture that the relation between CSR and CEO compensation may differ depending

on the components of CEO compensation. CEO compensation can be divided into cash- and

equity-based compensation. Cash-based compensation is regarded as a short-term incentive,

while equity-based compensation is known as an effective tool to mitigate agency problems by

aligning CEOs' interests with those of shareholders. If a firm is socially responsible, its board of

directors will be more likely to design the CEO compensation package in a desirable way for the

effective corporate governance system, compared to boards of directors of socially irresponsible

firms. Therefore, the proportion of equity-based compensation will be relatively higher for

socially responsible firms, while the proportion of cash-based compensation will be relatively

lower. If CSR performance is negatively correlated with CEO compensation, this argument

enables us to predict that the negative association is driven by a relatively low (high) proportion

of cash-based (equity-based) compensation.

This story may not apply in the case that a positive association between CSR performance and

CEO compensation is caused by CEO entrenchment. Given the prior finding that CEOs prefer

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cash-based compensation to equity-based compensation, such positive relation between CSR

performance and CEO compensation is expected to be driven by a relatively high (low)

proportion of cash-based (equity-based) compensation.

For this analysis, we estimate the following regressions of CEO compensation on CSR scores

with year and industry fixed effects:

𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽 × 𝑇𝐶𝑆𝑅𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (2)

where 𝐶𝑂𝑀𝑃𝑖𝑡 is CEO total compensation ( 𝑇𝐶𝑂𝑀𝑃𝑖𝑡 ), the proportion of cash-based

compensation (𝑃𝐶𝐴𝑆𝐻𝑖𝑡 ), or the proportion of equity-based compensation for firm i in year t

(𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡 ), and 𝑇𝐶𝑆𝑅𝑖𝑡−1 is lagged total CSR score calculated as the sum of net CSR scores

across six CSR categories (community, environment, diversity, employee relations, human rights,

and product) in year t-1. 6

Our main interest in Equation (2) lies in the regression coefficient on

the total CSR score, 𝛽. As addressed above, 𝛽 is expected to be either negative or positive with

the dependent variables of total compensation and the proportions of cash-based and equity-

based compensation.

In order to examine if test results are primarily driven by CSR strengths or concerns, we repeat

the above estimation using CSR strength and concern scores as separate independent variables as

follows:

𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽1 × 𝐶𝑆𝑅_𝑆𝑖𝑡−1 + 𝛽2 × 𝐶𝑆𝑅_𝐶𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (3)

where 𝐶𝑆𝑅_𝑆𝑖𝑡−1 and 𝐶𝑆𝑅_𝐶𝑖𝑡−1 are total strength and concern scores for firm i in year t-1.

Table 4 reports the estimation results of Equations (2) and (3). When we use CEO total

compensation as a dependent variable in the first column, a coefficient on the total CSR score is

significantly positive (0.012). It seems to suggest that CEOs tend to concentrate on CSR

performance with the intention of increasing their own benefits. This positive relation between 6 We conjecture that CEOs' equity-based compensation is determined based on their performance for the previous

year. In terms of cash-based compensation, however, Perry and Zenner (2001) and Comprix and Muller (2006)

address that bonuses are based on the current year's performance, while salaries are determined before the year-end

performance is released. Taken together, a firm's performance may contemporaneously affect the components of

CEO compensation. Given this, we repeat all regression analyses using contemporaneous variables to ensure that

our findings are robust. In unreported tables, the overall results are unchanged in terms of magnitude and

significance. These results are available upon request.

14

CSR performance and CEO total compensation turns out to be mainly driven by a positive

association between the CSR strength score and total compensation. When we use the CSR

strength and concern scores separately as independent variables in the second column,

coefficients on both scores are positive (0.021 and 0.003), but only the coefficient on the strength

score is statistically significant.


In Columns 3 through 6 of Table 4, we report regression results with the dependent variables of

the proportions of cash- and equity-based compensation. If CEO entrenchment is the main cause

of the positive relation between CSR performance and CEO compensation, we expect to find a

positive association between CSR and the proportion of cash-based compensation and a negative

association between CSR performance and the proportion of equity-based compensation. When

we use the proportion of cash-based compensation as a dependent variable in the third column,

the coefficient on the total CSR score is significantly negative (-0.002). On the other hand, when

we use the proportion of equity-based compensation in the fifth column, the coefficient on the

total CSR score is significantly positive (0.005).

The results suggest that high levels of total compensation for socially responsible firms are

mainly driven by a high proportion of equity-based compensation and a low proportion of cash-

based compensation. This contradicts our prior expectation that CEOs may use CSR activity as a

tool for their own benefits. Even though CEOs seem to engage in CSR activities for their own

interests, a change in compensation structure prevents such behavior from increasing agency

problems and hurting firm value. On the other hand, given the prior finding of the positive

impact of a firm's CSR performance on its financial and operational performance, the positive

relation between CSR and CEO compensation might simply indicate that CEOs are reasonably

compensated for their strong performance in CSR. To sum up, we conclude that socially

responsible firms have CEO compensation structures that mitigate agency problems and

contribute to improving firm value.

We also find that the associations between CSR and the proportions of cash- and equity-based

compensation are mainly driven by CSR strength scores. The regression results with the

independent variables of CSR strength and concern scores in the fourth and sixth columns show

15

that the coefficient on the CSR strength score (-0.004) is significantly negative for the proportion

of cash-based compensation, while it is significantly positive (0.007) for the proportion of

equity-based compensation.

The signs of coefficients on the board of directors and CEO-specific variables from a regression

of total compensation are consistent with prior studies. The coefficient on board size (BSIZE)

(0.156) is significantly positive, and the coefficient on CEO ownership (CEO_OWN) (-0.018) is

significantly negative. These results are consistent with Core et al. (1999) and Lambert et al.

(1993), who show that CEO compensation is higher when boards are less effective and CEO

ownership is higher. The coefficient on CEO duality (CEO_DUR) (0.031) is consistently

positive but insignificant for our sample. On the contrary, the coefficient on the percentage of

independent directors on board (PIND) (0.839) is significantly positive, showing that the

dependence of the board increases CEO total compensation.7 The coefficients on CEO age and

tenure (CEO_AGE and CEO_TEN) are significantly positive (0.01 and 0.011), confirming the

findings of Fahlenbrach (2009) that older CEOs and CEOs with longer tenure tend to receive

higher compensation.

Coefficients on firm-specific variables are also in line with prior findings. The coefficients on

sales and book-to-market are consistent with Core et al. (1999), suggesting that CEOs tend to

earn larger compensation when firms are larger and have higher investment opportunities

proxied by low book-to-market ratios. The positive coefficients on stock return and the standard

deviation of stock return show that CEOs tend to earn larger compensation when firms' stock

returns are higher and the standard deviation of stock returns is higher. The coefficient on firm

age (FAGE) (-0.107) is consistent with Fahlenbrach (2009), indicating that younger firms tend to

pay higher CEO compensation.

Overall, we find that firms with high CSR performance have relatively high levels of CEO

compensation compared to firms with low CSR performance. An in-depth analysis of the

compensation components shows that socially responsible firms tend to have a higher proportion

of equity-based compensation and a lower proportion of cash-based compensation than socially

irresponsible firms. These results suggest that a firm's CSR performance affects not only total

7 Core et al. (1999) also find a negative association between total compensation and the percentage of inside

directors on the board, claiming that there is no evidence that the percentage of inside directors leads to high CEO

compensation.

16

levels of CEO compensation but also the structure of CEO compensation in a way that reduces

agency problems and induces CEOs to align their interests with those of shareholders.

4.3. The effects of CSR on the relation between CEO compensation and firm value

We have shown that a firm's CSR performance has a great impact on CEO compensation

structure. The proportion of cash-based compensation tends to decrease with a firm's CSR

performance, while the proportion of equity-based compensation tends to increase with the CSR

performance. The results have direct implications for the implementation of a firm's CSR policy

and its dynamics with CEO characteristics. More importantly, however, the results imply that the

relation between CSR performance and CEO compensation may essentially affect firm value and

shareholders' wealth.

The effects of CSR and CEO compensation structure on firm value have been investigated

separately in existing studies. The agency theory suggests that granting equity-based

compensation provides CEOs with incentives to align their interests with those of shareholders

and maximize firm value, and it is supported by many early studies (Bryan et al 2000; DeFusco

et al. 1990; McConnell and Servaes 1990; Mehran 1995). A growing literature documents that a

firm's CSR activity improves firm performance and increases shareholders' values. Although we

find that these two factors that crucially affect firm value are closely correlated, it is not clear

how one of them affects the relation between the other and firm value. In particular, a firm's CSR

performance may reinforce or mitigate the effects of the components of CEO compensation on

firm value. Investigating this issue enables us to draw clear implications on the channels through

which a firm's CSR performance influences firm value.

Motivated by this, we investigate how a firm's CSR performance affects the relation between

CEO compensation components and firm value. To analyze this, we run the regression of a

measure for firm value on the total CSR score and the proportion of cash- or equity-based

compensation and their interaction term as follows:

𝑇𝑂𝐵𝐼𝑁𝑄𝑖𝑡 = 𝛼 + 𝛽1 × 𝑇𝐶𝑆𝑅𝑖𝑡−1 + 𝛽2 × 𝑃𝐶𝐴𝑆𝐻𝑖𝑡−1 𝑜𝑟 𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡−1 +

𝛽3 × 𝑃𝐶𝐴𝑆𝐻𝑖𝑡−1 × 𝑇𝐶𝑆𝑅𝑖𝑡−1 (𝑜𝑟 𝑃𝐸𝑄𝑈𝐼𝑇𝑌𝑖𝑡−1 × 𝑇𝐶𝑆𝑅𝑖𝑡−1) + 𝜽′𝜸 + 𝜀𝑖𝑡 (4)

17

Following Faleye (2007), we use Tobin's Q as a proxy for firm value. This is calculated as

market value of assets over book value of assets, where market value is the sum of book value of

assets, market value of common stock, and deferred taxes minus book value of common stock.

For explanatory variables, we include the proportions of cash- and equity-based compensation

and their interaction terms with the total CSR score. We also add to the equation some other

control variables that can possibly affect firm value, such as board size (BSIZE), the percentage

of outside directors on board (PIND), capital expenditure (CAPEX), leverage (LEV), sales

(SALE), and operating profitability (OPPROF).

Given the previous findings addressed above, we expect to find a positive association between

the total CSR score and Tobin's Q. Also, there will be a positive (negative) relationship between

the proportion of equity-based (cash-based) compensation and Tobin's Q. If a firm's CSR

performance reinforces the positive impact of equity-based compensation on firm value, the

coefficient on the interaction term between the proportion of equity-based compensation and the

CSR score will be significantly positive. In the same sense, if a firm's CSR performance

deteriorates the negative impact of cash-based compensation on firm value, the coefficient on the

interaction term between the proportion of cash-based compensation and firm value will be

significantly negative.

Table 5 reports the estimation results. The coefficient on the total CSR score is positive, although

it is not significant when we regress Tobin's Q on CSR, the proportion of equity-based

compensation, and their interaction term in column (2). With respect to the components of CEO

compensation, the coefficient on the proportion of cash-based compensation (-0.353) is

significantly negative, while the coefficient on the proportion of equity-based compensation

(0.562) is significantly positive. The results in general support the previous findings that CSR

performance and equity grants to CEOs have positive impacts on firm value.

In column (2), the coefficient on the interaction term between the proportion of equity-based

compensation and Tobin's Q (0.043) is significantly positive. This suggests that a firm's CSR

performance strengthens the positive effect of equity-based compensation on firm value. Given

our finding of the positive association between CSR performance and the proportion of equity-

based compensation, the result highlights the positive aspect of CSR on both CEO compensation

structure and firm value. Socially responsible firms tend to have a higher proportion of equity-

based compensation, and the positive marginal impact of higher equity-based compensation on

18

firm value is stronger for these firms. This demonstrates that the dynamics between CSR

performance and CEO compensation components boost firm value, which makes a firm's

engagement in CSR activities more valuable.

Overall, our results reveal that a firm's CSR performance not only increases the proportion of

equity-based compensation but also reinforces its positive role in firm value.

5. Additional Tests

5.1. CSR categories and CEO compensation structure

In the previous sections, we used the total CSR score as a measure of CSR performance, which is

calculated as the sum of net CSR scores across six CSR categories. However, if a given CSR

category contains certain issues that could affect CEO compensation, our findings on the effect

of CSR on CEO compensation and its structure can be more or less pronounced. For example,

firms with high CSR scores in employee relations may not exhibit a positive association between

CSR and CEO total compensation, because they particularly attempt to improve employee

relations by reducing CEO compensation.

Motivated by this, we further explore the link between CSR performance and CEO compensation

using the net CSR score on each category. We repeat the above analysis using net CSR scores on

the six categories as independent variables as follows:

𝐶𝑂𝑀𝑃𝑖𝑡 = 𝛼 + 𝛽1 × 𝐶𝑂𝑀𝑀𝑖𝑡−1 + 𝛽2 × 𝐸𝑁𝑉𝑖𝑡−1 + 𝛽3 × 𝐷𝐼𝑉𝑖𝑡−1 +

𝛽4 × 𝐸𝑅𝑖𝑡−1 + 𝛽5 × 𝐻𝑅𝑖𝑡−1 + 𝛽6 × 𝑃𝑅𝑂𝐷𝑖𝑡−1 + 𝜽′𝜸 + 𝜀𝑖𝑡 (5)

where 𝐶𝑂𝑀𝑀𝑖𝑡−1, 𝐸𝑁𝑉𝑖𝑡−1, 𝐷𝐼𝑉𝑖𝑡−1, 𝐸𝑅𝑖𝑡−1, 𝐻𝑅𝑖𝑡−1, and 𝑃𝑅𝑂𝐷𝑖𝑡−1 are lagged net CSR scores

on community, environment, diversity, employee relations, human rights, and product. The net

CSR score is calculated as the difference between the strength and concern scores on a given

CSR category.


19

Table 6 reports the estimation results of Equation (5). With the dependent variable of total

compensation, we find that the net CSR score is significantly positively associated with CEO

compensation in community, environment, and diversity. The coefficient on the net score in

employee relations is insignificantly positive, but this does not provide ample evidence that firms

focusing on improving employee relations tend to reduce CEO compensation. When we use the

proportion of cash-based compensation as a dependent variable, the regression coefficient on the

net CSR score is significantly negative in environment and human rights. Meanwhile, the net

CSR score is significantly positively associated with the proportion of equity-based

compensation in the categories of environment, diversity, and employee relations. The positive

relation between the net CSR score in employee relations and the proportion of equity-based

compensation demonstrates that firms paying attention to employee relations tend to have more

incentive-based compensation structure for their CEOs.

Overall, the results show that our findings on the effect of CSR on CEO compensation and its

components are more pronounced in certain CSR categories. The positive association between

CSR and the proportion of equity-based compensation is more pronounced in environment,

diversity and employee relations, while the negative association between CSR and the proportion

of cash-based compensation is more pronounced in environment and human rights.

5.2. The effect of CEO power on compensation structure

We posit that the board of directors plays an independent and important role in designing the

structure of CEO compensation and reducing agency problems.8 However, if CEOs have power

to be involved in the setting of their own compensation, they may exert their influence to design

the compensation for their own interests, leading to an increase in the agency problems. If this is

the case, our main results of the effect of CSR performance on CEO compensation may also

depend on CEOs' involvement in the determination of their compensation components.

Motivated by this, we examine the effect of CEO power on the relation between CSR

performance and CEO compensation components. For this analysis, we use CEO duality as a

8 Many prior studies show that the compensation committee of the board of directors aims to design CEO

compensation to mitigate the agency problem (Core and Guay 1999; Fama and Jensen 1983; Holmstrom 1979;

Jensen and Meckling 1976; Murphy 1985).

20

proxy for CEO power on the determination of compensation.9 The variable of CEO duality is a

dummy variable indicating one if a firm's CEO is a chairman of the board of directors and zero

otherwise. In Table 7, we add to the regression model in Table 4 an interaction term between

CEO duality and CSR performance to test if our results are robust.


Table 7 reports the estimation results. A coefficient on total CSR score is robustly positive when

we add the interaction term between CEO duality and total CSR score (CEO_DUR × TCSR) and

use total compensation or the proportion of equity-based compensation as a dependent variable.

Although a coefficient on the proportion of cash-based compensation is insignificantly negative,

the overall results confirm that high levels of CEO compensation for socially responsible firms

are mainly driven by a high proportion of equity-based compensation. When we run the

regression of total compensation in Column (1), the coefficient on the interaction term (-0.003) is

negative but insignificant. We also find that the coefficients on the interaction terms are not

statistically significant when we use cash- and equity-based compensation as dependent variables

in Columns (2) and (3). This suggests that our findings above are not affected by CEO duality.

Overall, our results on the effect of CSR performance on CEO compensation structure are robust

to the possible effect of CEO power on the setting of the compensation contract.

5.3. Sarbanes-Oxley Act of 2002 (SOX)

An exogenous shock, such as the enactment of accounting and financial regulations, may affect

the impact of CSR performance on CEO compensation. The implementation of SOX is one

example of an exogenous shock. SOX requires firms to disclose more accurate information and

meet the independence requirements of a firm's board of directors. This suggests that the passage

of SOX paved the way for improving the transparency of accounting disclosures and the

effectiveness of corporate governance system. Given this, the relations between CSR

performance and the components of CEO compensation could be affected by this environmental

9 We have already controlled for this effect by adding CEO duality as one of the control variables in the main

analysis. We use the same measure to analyze the effect of CEO power in more detail in this section.

21

change. In particular, enhancement in the independence of the board of directors might lead to a

more pronounced negative relation between CSR performance and cash-based compensation and

a more pronounced positive relation between CSR and equity-based compensation. Therefore,

our findings in Section 4.2 are expected to be more pronounced during the post-SOX period.


We divide the sample period into the pre-SOX (1998-2002) and post-SOX periods (2003-2012)

and repeat the analyses shown in Table 4. The regression results are reported in Table 8. The

results for the pre-SOX period in the first three columns show that the coefficient on total CSR

score is not statistically significant no matter if we use total compensation or any of the

compensation components as a dependent variable. On the contrary, our previous results are

robust in the post-SOX period, and the magnitudes of the coefficients are almost identical to

those in Table 4. The total CSR score is significantly positively associated with the total

compensation and the proportion of equity-based compensation, while it is significantly

negatively associated with the proportion of cash-based compensation.

Overall, we find that our results are mainly driven by the post-SOX period. This implies that the

independence of a firm's board of directors and the improved corporate governance system after

SOX play a crucial role in reinforcing the impact of CSR performance on CEO compensation

structure.

5.4. Two-stage least square (2SLS) model

We explore the association between CSR and CEO compensation after controlling for other firm

characteristic and corporate governance variables used in prior studies. Regardless, the problem

of omitted variables may still arise. In this section, we address this concern using a 2SLS

approach with an instrumental variable (IV).

Following Cai, Jo, and Pan (2011), we use the industry median of CSR scores as an IV.10

We

first estimate firm-level CSR scores from a regression of total CSR score on the industry-median.

10

As Cai et al. (2011) point out, the industry-median CSR is one of the IVs that meet both conditions for instrument

relevance and exogeneity in our setup.

22

In the second stage, we run regressions of compensation measures on the estimated value of

firm-level CSR (𝐼𝑉𝐶𝑆𝑅). For the 2SLS regressions, we use the same control variables shown in

Table 4.


Table 9 reports the 2SLS regression results. The regression coefficients on CSR are consistent

with the coefficients shown in Table 4. Furthermore, the results are stronger in terms of

magnitude and significance compared to the results in Table 4.

Overall, the 2SLS results confirm our findings in this study, supporting that a firm's CSR

performance is positively associated with equity-based compensation and negatively associated

with cash-based compensation.

6. Summary and Conclusion

We investigate how a firm's CSR activity is associated with CEO total compensation and the

compensation structure. We find that socially responsible firms have relatively high levels of

CEO total compensation. This seems to suggest that CEOs strategically engage in CSR activities

to pursue their own interests. However, when we look into the relation between a firm's CSR

performance and each component of compensation, we find that the proportion of equity-based

compensation is positively related to CSR performance, while the proportion of cash-based

compensation is negatively related to CSR performance. These results suggest that a firm's CSR

performance has a great impact not only on levels of CEO total compensation but also on the

compensation structure.

Our results show that, although total levels of CEO compensation tend to increase with a firm's

CSR performance, it is primarily driven by the proportion of equity-based compensation. Given

that equity-based compensation is known as a long-term incentive and plays an important role in

reducing agency problems, we show that a firm's CSR activity affects CEO compensation

structure in a desirable way that motivates CEOs to align their interests with those of

shareholders and eventually increase firm value. This also implies that socially responsible firms

23

have a well-functioning corporate governance system in designing the CEO compensation

package.

We further find that the results are more pronounced in certain CSR categories. The negative

impact of CSR performance on the proportion of cash-based compensation is more pronounced

in environment and human rights, while the positive impact of CSR performance on the

proportion of equity-based compensation is more pronounced in environment, diversity, and

employee relations. Also, our results turn out to be mainly driven by the post-SOX period.

Overall, the results suggest that firms' active engagement in CSR activities and its social

performance improve CEO compensation structure in a way that induces CEOs to maximize firm

values in the long run and reinforces firms’ corporate governance system. Given the fact that

CEOs formulate and implement firms' CSR policies, our results offer important insights into how

and to what extent they determine firms' engagement in CSR activities. Although our study

focuses on the effect of CSR performance on CEO compensation structure, our findings also

suggest avenues for further research on how a firm's CSR performance contributes to forming

the profiles of CEOs and how CEOs perceive their role in firms' CSR activities.

24

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Appendix 1

CSR variables

Variables Strengths Concerns

Qualitative issue areas

Community Charitable giving, innovative

giving, non-US charitable giving,

support for housing, support for

education, indigenous peoples

relations, volunteer programs, and

other strength

Investment controversies,

negative economic impact,

indigenous peoples relations,

tax disputes, and other

concern

Corporate governance Limited compensation, ownership,

transparency, political

accountability, and other strength

High compensation,

ownership, accounting,

transparency, political

accountability, and other

concern

Diversity CEO, promotion, board of

directors, work/life benefits,

women & minority contracting,

employment of the disabled, gay &

lesbian policies, and other strength

Controversies, non-

representation, and other

concern

Employee relations Union relations, no-layoff policy,

cash profit sharing, employee

involvement, retirement benefits

strength, health and safety strength,

and other strength

Union relations, health and

safety, workforce reductions,

retirement benefits, and other

concern

Environment Beneficial products and services,

pollution prevention, recycling,

clean energy, communications,

property/plant/equipment,

management systems, and other

strength

Hazardous waste, regulatory

problems, ozone depleting

chemicals, substantial

emissions, agricultural

chemicals, climate change,

and other concern

Human rights Positive record in South Africa,

indigenous peoples relations, labor

rights, and other strength

South Africa, Northern

Ireland, Burma, Mexico,

labor rights, indigenous

peoples relations, and other

concern

Product Quality, R&D/Innovation, Benefits

to economically disadvantaged, and

other strength

Product safety,

marketing/contracting,

antitrust, and other concern

29

Controversial business issues

Alcohol Licensing, manufacturers, manufacturers of products necessary for

production of alcoholic beverages, retailers, ownership by an

alcohol company, ownership of an alcohol company, and alcohol

other concern

Gambling Licensing, manufacturers, owners and operators, supporting

products or services, ownership by a gambling company, ownership

of a gambling company, and gambling other concern

Tobacco Licensing, manufacturers, manufacturers of products necessary for

production of tobacco, retailers, ownership by a tobacco company,

ownership of a tobacco company, and tobacco other concern

Firearms Manufacturers, retailers, ownership by a firearms company, and

ownership of a firearms company

Military Manufacturers of weapons or weapons systems, manufacturers of

components for weapons or weapons systems, ownership by a

military company, ownership of a military company, minor

weapons contracting involvement, major weapons-related supplier,

and military other concern

Nuclear power Construction & design of nuclear power plants, nuclear power fuel

and key parts, nuclear power service provider, ownership of nuclear

power plants, ownership by a nuclear power company, design, fuel

cycle/key parts, and nuclear power other concern

30

Appendix 2

Variable definitions

Variables Definitions Source

CSR variables KLD STATS

TCSR The sum of net CSR scores in six categories

(community, environment, diversity, employee

relations, human rights, and product). The net

CSR scores are calculated as the total number of

strengths minus the total number of concerns in

each category.

CSR_S Total number of strengths in the six CSR

categories

CSR_C Total number of concerns in the six CSR

categories

COMM Net community CSR scores

DIV Net diversity CSR scores

ENV Net environment CSR scores

ER Net employee relations CSR scores

HR Net human rights CSR scores

PROD Net product CSR scores

Compensation and CEO-specific variables EXECUCOMP

TCOMP The sum of salary, bonus, total value of restricted

stocks and stock options granted during the fiscal

year, long-term incentive payouts, and all other

compensation

CASH The sum of salary and bonus

EQUITY The sum of the value of restricted stocks and the

Black-Scholes value of stock options granted

during the fiscal year11

PCASH The proportion of cash-based compensation to

total compensation

PEQUITY The proportion of equity-based compensation to

total compensation

BSIZE The logarithm of total number of directors on the

board of directors

CEO_AGE CEO age

11

It is calculated as the sum of OPTION_AWARDS_BLK_VALUE and RSTKGRNT before the introduction of

FAS123R in 2006 and the sum of OPTION_AWARDS_FV and STOCK_AWARDS_FV after 2006.

31

CEO_DUR 1 if a CEO is a chairman of the board of

directors, 0 otherwise

CEO_OWN The number of shares owned by CEOs scaled by

the total number of shares outstanding

CEO_TEN The number of years the CEO has held the

current position

PIND Percentage of independent directors on board

Firm-specific variables

BETA Market beta obtained from the regression of a

firms' excess returns on the CRSP value-

weighted index

CRSP

BM Total equity divided by market value of equity

(total number of shares outstanding multiplied by

stock price at the end of the fiscal year)

COMPUSTAT

CAPEX The ratio of capital expenditure to total assets COMPUSTAT

FAGE The logarithm of the number of years during

which a firm has been shown in the CRSP

database

COMPUSTAT

LAGRET Lagged value of the aggregated return CRSP

LEV Total debt divided by total assets COMPUSTAT

LIQ Current assets over current liabilities COMPUSTAT

OPPROF The ratio of operating income before depreciation

to total assets

COMPUSTAT

RET Aggregated return for 12 months CRSP

ROA Operating income before depreciation divided by

book value of assets

COMPUSTAT

SALE The logarithm of sales COMPUSTAT

STDRET Standard deviation of aggregated returns over 5

years

CRSP

TOBINQ Market value of assets (book value of assets +

market value of common stock - book value of

common stock + deferred taxes) over book value

of assets

COMPUSTAT

32

Table 1

Descriptive statistics

This table reports the summary statistics for variables used in the analysis. Panels A, B, and C show the statistics of

CSR, compensation, and CEO characteristic variables, and firm characteristic variables, respectively. The

definitions of the variables are described in Appendix 2.

Panel A. CSR variables

N Mean p25 Median p75 SD

TCSR 7,795 0.23 -1 0 1 2.77

CSR_S 7,795 1.92 0 1 3 2.81

CSR_C 7,795 1.69 0 1 2 1.86

COMM 7,795 0.12 0 0 0 0.57

DIV 7,795 0.22 -1 0 1 1.44

ENV 7,795 0.09 0 0 0 0.98

ER 7,795 -0.01 -1 0 0 1.11

HR 7,795 -0.04 0 0 0 0.3

PROD 7,795 -0.15 0 0 0 0.65

Panel B. Compensation and CEO characteristic variables


TCOMP (000s) 7,739 5,285 1,721 3,379 6,361 8,137

CASH (000s) 7,795 1,035 560 805 1,129 1,428

EQUITY (000s) 7,532 3,213 572 1,665 3,810 7,265

PCASH (%) 7,739 32.6 15.13 24.44 42.45 24.39

PEQUITY (%) 7,529 47.97 33.52 52.64 66.52 25.58

BSIZE 7,795 2.18 2.08 2.2 2.4 0.24

CEO_AGE 7,795 53.6 49 53 58 6.8

CEO_DUR 7,795 0.15 0 0 0 0.36

CEO_OWN 7,588 2.61 0.16 0.64 2.01 6.28

CEO_TEN 7,795 5.89 0 4 8 7.02

PIND (%) 7,795 75.46 66.67 77.78 87.5 13.23

33

Panel C. Firm characteristic variables


BETA 7,795 1.23 0.61 1.12 1.73 0.94

BM 7,795 0.49 0.27 0.43 0.64 0.31

CAPEX 7,675 0.05 0.02 0.04 0.07 0.06

FAGE 7,795 3.05 2.56 3 3.64 0.74

LEV 7,795 0.2 0.04 0.19 0.31 0.16

LIQ 7,795 2.4 1.31 1.93 2.86 1.69

OPPROF 6,343 0.17 0.1 0.15 0.22 0.11

RET (%) 7,795 0.14 -0.06 0.15 0.34 0.37

ROA 7,795 0.11 0.06 0.1 0.15 0.08

SALE 7,795 7.58 6.54 7.46 8.56 1.47

STDRET (%) 7,795 0.39 0.22 0.33 0.5 0.24

TOBINQ 7,231 1.95 1.2 1.58 2.26 1.24

34

Table 2

Pearson correlations

This table reports Pearson correlations between CSR and compensation and CEO-specific variables. The definitions

of the variables are described in Appendix 2, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level,

respectively.

TCSR CSR_S CSR_C TCOMP CASH EQUITY PCASH PEQUITY

TCSR 1

*** 0.78

*** -0.31

*** 0.17

*** 0.03

*** 0.15

*** -0.15

*** 0.15

***

CSR_S

1***

0.35***

0.29***

0.13***

0.23***

-0.24***

0.19***

CSR_C

1***

0.19***

0.15***

0.13***

-0.15***

0.06***

TCOMP

1***

0.37***

0.96***

-0.35***

0.34***

CASH

1***

0.19***

0.06***

0.02***

EQUITY

1***

-0.31***

0.38***

PCASH

1***

-0.73***

PEQUITY

1***

35

Table 3

Impact of CSR disclosure on CEO compensation

This table reports regression results of a set of compensation variables on the disclosure of CSR with year- and

industry-fixed effects. The dependent variables are total compensation and the proportions of cash- and equity-based

compensation over the total compensation. The independent variables are described in Appendix 2. CSRDIS equals

one if a firm has CSR scores in the previous year and zero otherwise. t-statistics are reported in parentheses below

the coefficient estimates, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.

(1) TCOMP (2) PCASH (3) PEQUITY

Intercept 4.044***

1.019***

0.228***

(30.69)***

(27.65)***

(5.75)**

CSRDIS 0.126***

-0.085***

0.011**

(4.55)***

(-11)***

(1.31)**

BSIZE 0.136***

-0.036***

0.027**

(2.87)***

(-2.72)***

(1.86)***

PIND 0.729***

-0.349***

0.182***

(10.89)***

(-18.66)***

(8.98)***

CEO_OWN -0.015***

0.005***

-0.005***

(-11.14)***

(13.65)***

(-12.5)***

CEO_DUR 0.045***

-0.004***

0.018***

(1.81)***

(-0.62)***

(2.35)***

CEO_AGE 0.006***

0.000***

-0.003***

(3.92)***

(0.13)***

(-5.41)***

CEO_TEN 0.011***

0.000***

0.000***

(7.13)***

(-0.63)***

(-0.53)***

SALE 0.384***

-0.046***

0.037***

(44.5)***

(-18.9)***

(14.18)***

BM -0.298***

0.085***

-0.107***

(-8.50)***

(8.63)***

(-10.09)***

ROA -0.884***

0.233***

-0.346***

(-6.64)***

(6.27)***

(-8.59)***

TOBINQ 0.077***

-0.013***

0.02***

(8.59)***

(-5.04)***

(7.55)***

LEV 0.195***

-0.022***

0.004***

(3.24)***

(-1.32)***

(0.23)***

LIQ 0.001***

-0.004***

0.009***

(0.11)***

(-2.15)***

(4.59)***

FAGE -0.079***

0.022***

-0.03***

(-5.71)***

(5.73)***

(-7.11)***

BETA 0.008***

-0.006***

0.001***

(0.84)***

(-2.14)***

(0.28)***

RET 0.201***

-0.022***

-0.009***

(8)***

(-3.16)***

(-1.14)***

36

LAGRET 0.102***

-0.017***

0.016***

(4.37)***

(-2.65)***

(2.32)***

STDRET 0.3***

-0.065***

0.077***

(7.13)***

(-5.54)***

(6.06)***

Year-fixed effects Yes***

Yes***

Yes***

Industry-fixed effects Yes***

Yes***

Yes***

R2 0.402

*** 0.249

*** 0.141

***

37

Table 4

Impact of CSR performance on CEO compensation structure

This table reports regression results of CEO total compensation and the proportions of cash- and equity-based

compensation on CSR with year and industry-fixed effects. The dependent variables are total compensation and the

proportions of cash- and equity-based compensation. The independent variables are described in Appendix 2. For

the CSR variables, we use the total CSR score and the total strength and concern scores in separate regressions. t-

statistics are reported in parentheses below the coefficient estimates, and ‘***’, ‘**’, ‘*’ represent significance at

1%, 5%, and 10% level, respectively.


Intercept 4.044***

4.216***

0.968***

0.929***

0.220***

0.255***

(24.85)***

(24.46)***

(22.16)***

(20.05)***

(4.56)***

(4.97)***

TCSR 0.012***

-0.002***

0.005***

(2.99)***

(-1.69)***

(4.29)***

CSR_S 0.021***

-0.004***

0.007***

(4.21)***

(-2.71)***

(4.63)***

CSR_C 0.003***

-0.001***

-0.002***

(0.44)***

(-0.73)***

(-1.05)***

BSIZE 0.156***

0.15***

-0.026***

-0.025***

0.031***

0.03***

(2.75)***

(2.64)***

(-1.72)***

(-1.63)***

(1.85)***

(1.79)***

PIND 0.839***

0.823***

-0.424***

-0.418***

0.234***

0.229***

(10.02)***

(9.71)***

(-18.88)***

(-18.34)***

(9.39)***

(9.05)***

CEO_OWN -0.018***

-0.018***

0.006***

0.006***

-0.005***

-0.005***

(-10.23)***

(-10.27)***

(12.24)***

(12.17)***

(-9.84)***

(-9.84)***

CEO_DUR 0.045***

0.039***

0.002***

0.002***

0.01***

0.01***

(1.58)***

(1.37)***

(0.26)***

(0.21)***

(1.22)***

(1.19)***

CEO_AGE 0.01***

0.009***

-0.001***

-0.001***

-0.002***

-0.002***

(5.29)***

(5.04)***

(-2.13)***

(-1.8)***

(-3.7)***

(-3.88)***

CEO_TEN 0.011***

0.011***

0.000***

0.000***

0.000***

0.000***

(5.92)***

(6.08)***

(-0.65)***

(-0.81)***

(-0.06)***

(0.08)***

SALE 0.367***

0.347***

-0.042***

-0.038***

0.034***

0.03***

(36.67)***

(29.44)***

(-15.64)***

(-12)***

(11.38)***

(8.6)***

BM -0.242***

-0.234***

0.054***

0.051***

-0.094***

-0.091***

(-5.06)***

(-4.84)***

(4.24)***

(3.94)***

(-6.6)***

(-6.33)***

ROA -0.909***

-0.862***

0.235***

0.225***

-0.414***

-0.402***

(-5.23)***

(-4.94)***

(5.04)***

(4.79)***

(-8.01)***

(-7.73)***

TOBINQ 0.085***

0.084***

-0.014***

-0.014***

0.024***

0.024***

(6.86)***

(6.77)***

(-4.33)***

(-4.29)***

(6.62)***

(6.53)***

LEV 0.349***

0.355***

-0.053***

-0.056***

0.04***

0.042***

(4.79)***

(4.85)***

(-2.72)***

(-2.87)***

(1.84)***

(1.93)***

LIQ -0.007***

-0.009***

-0.001***

0.000***

0.008***

0.008***

(-0.89)***

(-1.21)***

(-0.31)***

(-0.05)***

(3.72)***

(3.53)***

FAGE -0.107***

-0.114***

0.03***

0.031***

-0.039***

-0.04***

38

(-6.22)***

(-6.51)***

(6.51)***

(6.69)***

(-7.51)***

(-7.72)***

BETA 0.013***

0.013***

-0.005***

-0.005***

-0.001***

-0.001***

(1.11)***

(1.07)***

(-1.58)***

(-1.55)***

(-0.2)***

(-0.19)***

RET 0.203***

0.209***

-0.028***

-0.03***

-0.017***

-0.015***

(6.58)***

(6.76)***

(-3.43)***

(-3.58)***

(-1.84)***

(-1.64)***

LAGRET 0.076***

0.078***

-0.011***

-0.011***

0.008***

0.008***

(2.72)***

(2.79)***

(-1.48)***

(-1.52)***

(0.91)***

(0.94)***

STDRET 0.228***

0.218***

-0.02***

-0.018***

0.044***

0.042***

(4.57)***

(4.35)***

(-1.53)***

(-1.36)***

(2.94)***

(2.78)***


Yes***

Yes***

Yes***

Yes***

Yes***


Yes***

Yes***

Yes***

Yes***

Yes***

R2 0.38

*** 0.38

*** 0.209

*** 0.209

*** 0.133

*** 0.133

***

39

Table 5

Impacts of CSR performance on the relation between CEO compensation and firm value

This table reports regression results of Tobin's Q on the total CSR score and the proportion of cash- or equity-based

compensation and their interaction term with year and industry-fixed effects. The dependent and independent

variables are described in Appendix 2. t-statistics are reported in parentheses below the coefficient estimates, and

‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.

(1) (2)

Intercept 2.832***

2.465***

(19.67)***

(18.57)***

TCSR 0.042***

0.016***

(6.17)***

(1.39)***

PCASH -0.353***

(-6.41)***

PCASH× TCSR 0.001***

(0.03)***

PEQUITY

0.562***

(11.1)***

PEQUITY× TCSR

0.043***

(2.22)***

BSIZE -0.192***

-0.208***

(-3.04)***

(-3.25)***

PIND -0.618***

-0.618***

(-6.16)***

(-6.25)***

CAPEX -2.163***

-2.3***

(-9.68)***

(-9.94)***

LEV -1.077***

-1.109***

(-13.62)***

(-13.81)***

SALE -0.088***

-0.085***

(-8.19)***

(-7.85)***

OPPROF 6.423***

6.45***

(55.34)***

(55.13)***


Yes***


Yes***

R2 0.418

*** 0.427

***

40

Table 6

Impact of CSR performance for each category on CEO compensation structure


compensation on the net CSR score on each CSR category with year and industry-fixed effects. The dependent

variables are total compensation and the proportions of cash- and equity-based compensation. The independent




Intercept 4.197***

0.993***

0.21***

(25.27)***

(22.27)***

(4.24)***

COMM 0.055***

0.003***

-0.002***

(2.69)***

(0.57)***

(-0.32)***

ENV 0.022***

-0.016***

0.009***

(1.9)***

(-5)***

(2.59)***

DIV 0.021***

0.005***

0.005***

(2.42)***

(2.13)***

(1.85)***

ER 0.004***

0.001***

0.007***

(0.34)***

(0.31)***

(1.99)***

HR -0.055***

-0.021***

0.009***

(-1.43)***

(-2.06)***

(0.75)***

PROD -0.064***

0.007***

0.002***

(-3.78)***

(1.48)***

(0.3)***

BSIZE 0.141***

-0.034***

0.033***

(2.49)***

(-2.21)***

(1.96)***

PIND 0.819***

-0.419***

0.233***

(9.77)***

(-18.6)***

(9.28)***

CEO_OWN -0.019***

0.006***

-0.005***

(-10.5)***

(12.04)***

(-9.75)***

CEO_DUR 0.042***

-0.001***

0.011***

(1.48)***

(-0.07)***

(1.27)***

CEO_AGE 0.01***

-0.001***

-0.002***

(5.27)***

(-1.74)***

(-3.74)***

CEO_TEN 0.011***

0.000***

0.000***

(6)***

(-0.73)***

(0.01)***

SALE 0.346***

-0.044***

0.034***

(32.23)***

(-15.3)***

(10.61)***

BM -0.229***

0.057***

-0.094***

(-4.79)***

(4.43)***

(-6.61)***

ROA -0.884***

0.243***

-0.413***

(-5.09)***

(5.2)***

(-7.98)***

TOBINQ 0.083***

-0.015***

0.024***

41

(6.71)***

(-4.53)***

(6.55)***

LEV 0.351***

-0.046***

0.038***

(4.8)***

(-2.32)***

(1.74)***

LIQ -0.009***

0.000***

0.008***

(-1.16)***

(-0.09)***

(3.69)***

FAGE -0.102***

0.027***

-0.037***

(-6.31)***

(6.31)***

(-7.58)***

BETA 0.017***

-0.005***

-0.001***

(1.38)***

(-1.65)***

(-0.17)***

RET 0.211***

-0.026***

-0.017***

(6.84)***

(-3.13)***

(-1.83)***

LAGRET 0.086***

-0.006***

0.007***

(3.06)***

(-0.81)***

(0.85)***

STDRET 0.223***

-0.022***

0.044***

(4.46)***

(-1.66)***

(2.96)***


Yes***

Yes***


Yes***

Yes***

R2 0.384

*** 0.214

*** 0.134

***

42

Table 7

Impact of CEO power on the CSR - CEO compensation relationship


compensation on CSR and an interaction term between CEO duality and CSR (CEO_DUR × TCSR) with year and

industry-fixed effects. The dependent variables are total compensation and the proportions of cash- and equity-based

compensation. The independent variables are described in Appendix 2. t-statistics are reported in parentheses below

the coefficient estimates, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.


Intercept 4.044***

0.968***

0.22***

(24.85)***

(22.16)***

(4.56)***

TCSR 0.013***

-0.002***

0.005***

(2.83)***

(-1.36)***

(3.98)***

BSIZE 0.155***

-0.026***

0.031***

(2.75)***

(-1.73)***

(1.85)***

PIND 0.839***

-0.424***

0.234***

(10.02)***

(-18.88)***

(9.39)***

CEO_OWN -0.018***

0.006***

-0.005***

(-10.23)***

(12.23)***

(-9.84)***

CEO_DUR 0.046***

0.002***

0.01***

(1.59)***

(0.27)***

(1.22)***

CEO_DUR× TCSR -0.003***

-0.001***

-0.001***

(-0.27)***

(-0.42)***

(-0.22)***

CEO_AGE 0.01***

-0.001***

-0.002***

(5.3)***

(-2.12)***

(-3.69)***

CEO_TEN 0.011***

0.000***

0.000***

(5.92)***

(-0.65)***

(-0.06)***

SALE 0.367***

-0.042***

0.034***

(36.66)***

(-15.65)***

(11.37)***

BM -0.242***

0.054***

-0.094***

(-5.06)***

(4.24)***

(-6.6)***

ROA -0.909***

0.235***

-0.414***

(-5.22)***

(5.04)***

(-8)***

TOBINQ 0.085***

-0.014***

0.024***

(6.86)***

(-4.33)***

(6.62)***

LEV 0.35***

-0.053***

0.04***

(4.79)***

(-2.71)***

(1.84)***

LIQ -0.007***

-0.001***

0.008***

(-0.89)***

(-0.31)***

(3.73)***

FAGE -0.107***

0.03***

-0.038***

(-6.22)***

(6.51)***

(-7.5)***

BETA 0.013***

-0.005***

-0.001***

(1.11)***

(-1.58)***

(-0.2)***

43

RET 0.203***

-0.028***

-0.017***

(6.58)***

(-3.43)***

(-1.83)***

LAGRET 0.076***

-0.011***

0.008***

(2.73)***

(-1.46)***

(0.92)***

STDRET 0.228***

-0.021***

0.044***

(4.56)***

(-1.53)***

(2.94)***


Yes***

Yes***


Yes***

Yes***

R2 0.38

*** 0.209

*** 0.133

***

44

Table 8

Impact of CSR performance on CEO compensation structure: pre- and post-SOX periods


compensation on CSR during the pre-SOX (1998-2002) and post-SOX (2003-2012) periods. The dependent

variables are total compensation and the proportions of cash- and equity-based compensation. The independent



(1) Pre-SOX (1998-2002) (2) Post-SOX (2003-2012)

TCOMP PCASH PEQUITY TCOMP PCASH PEQUITY

Intercept 6.388***

0.969***

0.513***

3.965***

0.951***

0.19***

(5.62)***

(3.44)***

(1.66)***

(24.11)***

(21.41)***

(3.86)***

TCSR -0.018***

0.007***

-0.003***

0.013***

-0.002***

0.005***

(-0.55)***

(0.89)***

(-0.37)***

(3.07)***

(-1.97)***

(4.41)***

BSIZE 0.349***

-0.182***

0.091***

0.158***

-0.024***

0.023***

(1.12)***

(-2.37)***

(1.02)***

(2.75)***

(-1.53)***

(1.32)***

PIND 1.374***

-0.319***

0.232***

0.802***

-0.416***

0.266***

(3.32)***

(-3.11)***

(2.03)***

(9.15)***

(-17.6)***

(10.11)***

CEO_OWN -0.02***

0.003***

-0.008***

-0.018***

0.006***

-0.005***

(-1.71)***

(0.92)***

(-2.35)***

(-10.02)***

(12.3)***

(-9.37)***

CEO_DUR 0.056***

0.034***

0.001***

0.041***

0.002***

0.009***

(0.3)***

(0.74)***

(0.03)***

(1.42)***

(0.25)***

(1.02)***

CEO_AGE 0.006***

0.001***

-0.002***

0.01***

-0.001***

-0.002***

(0.45)***

(0.28)***

(-0.53)***

(5.22)***

(-1.84)***

(-3.2)***

CEO_TEN 0.018***

-0.006***

0.000***

0.011***

0.000***

0.000***

(1.24)***

(-1.77)***

(0.03)***

(5.93)***

(-0.12)***

(-0.06)***

SALE 0.178***

-0.005***

0.002***

0.371***

-0.043***

0.034***

(2.81)***

(-0.35)***

(0.1)***

(36.84)***

(-15.62)***

(11.31)***

BM -1.23***

0.149***

-0.223***

-0.201***

0.054***

-0.089***

(-3.97)***

(1.94)***

(-2.67)***

(-4.11)***

(4.1)***

(-6.05)***

ROA -3.971***

0.591***

-0.891***

-0.725***

0.194***

-0.359***

(-4.18)***

(2.51)***

(-3.52)***

(-4.04)***

(4)***

(-6.66)***

TOBINQ 0.064***

-0.024***

0.021***

0.085***

-0.011***

0.021***

(1.6)***

(-2.38)***

(1.94)***

(5.96)***

(-2.89)***

(4.84)***

LEV -0.208***

-0.027***

0.044***

0.353***

-0.052***

0.028***

(-0.42)***

(-0.22)***

(0.33)***

(4.82)***

(-2.63)***

(1.26)***

LIQ -0.133***

0.019***

-0.009***

-0.004***

-0.001***

0.009***

(-2.37)***

(1.38)***

(-0.63)***

(-0.53)***

(-0.58)***

(3.88)***

FAGE -0.197***

0.01***

-0.033***

-0.098***

0.029***

-0.037***

(-1.96)***

(0.41)***

(-1.14)***

(-6.07)***

(6.56)***

(-7.68)***

BETA 0.043***

-0.042***

0.027***

0.008***

-0.002***

-0.001***

(0.5)***

(-1.97)***

(1.18)***

(0.7)***

(-0.63)***

(-0.28)***

RET 0.043***

0.004***

-0.007***

0.215***

-0.031***

-0.016***

45

(0.24)***

(0.08)***

(-0.14)***

(6.9)***

(-3.72)***

(-1.7)***

LAGRET 0.342***

-0.108***

0.069***

0.057***

-0.005***

0.002***

(2.19)***

(-2.79)***

(1.63)***

(2.04)***

(-0.66)***

(0.25)***

STDRET 0.074***

-0.07***

-0.007***

0.228***

-0.02***

0.044***

(0.19)***

(-0.73)***

(-0.06)***

(4.58)***

(-1.46)***

(2.94)***


Yes***

Yes***

Yes***

Yes***

Yes***


Yes***

Yes***

Yes***

Yes***

Yes***

R2 0.318

*** 0.233

*** 0.216

*** 0.393

*** 0.214

*** 0.13

***

46

Table 9

Two-stage least squares regressions (2SLS)

This table reports results of the 2SLS regressions with an instrumental variable. In the first stage, we obtain the fitted

value of firm-level CSR (IVCSR) from a regression of a total CSR score on the industry median of CSR scores. In

the second-stage regression, we regress total compensation or the proportions of cash- and equity-based

compensation on the estimated value of the CSR scores from the first-stage regression with year-fixed effects. The

independent variables are described in Appendix 2. t-statistics are reported in parentheses below the coefficient

estimates, and ‘***’, ‘**’, ‘*’ represent significance at 1%, 5%, and 10% level, respectively.

TCOMP PCASH PEQUITY

Intercept 4.252***

0.847***

0.336***

(20.54)***

(15.87)***

(5.48)***

IVCSR 0.038***

-0.006***

0.008***

(3.16)***

(-2.04)***

(2.2)***

BSIZE 0.157***

-0.037***

0.028***

(2.76)***

(-2.54)***

(1.66)***

PIND 0.793***

-0.267***

0.249***

(8.68)***

(-11.33)***

(9.26)***

CEO_OWN -0.017***

0.005***

-0.005***

(-9.68)***

(11.67)***

(-9.4)***

CEO_DUR 0.031***

-0.002***

0.014***

(1.01)***

(-0.28)***

(1.53)***

CEO_AGE 0.009***

0.000***

-0.002***

(4.57)***

(0.4)***

(-3.63)***

CEO_TEN 0.011***

0.000***

0.000***

(5.71)***

(0.03)***

(-0.32)***

SALE 0.373***

-0.042***

0.035***

(37.45)***

(-16.28)***

(11.97)***

BM -0.26***

0.087***

-0.105***

(-5.32)***

(6.92)***

(-7.31)***

ROA -0.971***

0.346***

-0.409***

(-5.51)***

(7.61)***

(-7.86)***

TOBINQ 0.091***

-0.019***

0.023***

(7.22)***

(-5.96)***

(6.21)***

LEV 0.353***

-0.073***

0.027***

(4.81)***

(-3.88)***

(1.25)***

LIQ -0.007***

-0.001***

0.008***

(-0.97)***

(-0.34)***

(3.78)***

FAGE -0.102***

0.027***

-0.037***

(-6.27)***

(6.46)***

(-7.77)***

BETA 0.013***

-0.004***

0.003***

(1.09)***

(-1.16)***

(0.9)***

RET 0.176***

-0.029***

-0.024***

47

(4.8)***

(-3.11)***

(-2.23)***

LAGRET 0.075***

-0.018***

-0.006***

(2.23)***

(-2.1)***

(-0.63)***

STDRET 0.203***

-0.025***

0.036***

(3.94)***

(-1.88)***

(2.34)***


Yes Yes***

R2 0.381

*** 0.268 0.142

***

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