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Do Contracts Make Them Care? The Impact of CEO Compensation Design on Corporate Social Performance

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Listed:
  • Jean McGuire

    (Louisiana State University)

  • Jana Oehmichen

    (Georg-August University Göttingen)

  • Michael Wolff

    (Georg-August University Göttingen)

  • Roman Hilgers

    (Georg-August University Göttingen)

Abstract

Using the behavioral agency model, we analyze how two compensation design characteristics, pay-performance sensitivity and duration of CEO compensation (taking into account multiple vesting periods), affect corporate social performance. We find that the performance sensitivity of CEO pay is negatively associated with poor social performance but also negatively affects strong social performance. These results suggest that pay-performance sensitivity increases the relevance of potential negative consequences of poor social performance. However, the ‘insurance’ benefits of strong social performance may also become less relevant. With respect to the duration of CEO compensation, we find that it reduces poor social performance. This finding confirms arguments that a long-term compensation time horizon increases the perceived threat that the negative effects of poor social performance will become visible. With our findings, we integrate behavioral agency theory with the traditional stakeholder views.

Suggested Citation

  • Jean McGuire & Jana Oehmichen & Michael Wolff & Roman Hilgers, 2019. "Do Contracts Make Them Care? The Impact of CEO Compensation Design on Corporate Social Performance," Journal of Business Ethics, Springer, vol. 157(2), pages 375-390, June.
    • Handle: RePEc:kap:jbuset:v:157:y:2019:i:2:d:10.1007_s10551-017-3601-8
    DOI: 10.1007/s10551-017-3601-8
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    8. Bhaskar, Ratikant & Li, Peigong & Bansal, Shashank & Kumar, Satish, 2023. "A new insight on CEO characteristics and corporate social responsibility (CSR): A meta-analytical review," International Review of Financial Analysis, Elsevier, vol. 89(C).
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