Executive compensation and corporate social responsibility: does a golden parachute matter?

Abstract

Purpose

This study examines the efficacy of compensation in encouraging corporate executives to promote corporate social responsibility (CSR). In particular, it closely examines the effect of a golden parachute (GP) on an executive's behavior toward CSR.

Design/methodology/approach

This study uses longitudinal data on 1,301 US firms for the period from 1993 to 2013. The data comes from Compustat, MSCI ESG STATS, RiskMetrics and ExecuComp.

Findings

We find an inverse association between current and long-term compensations and GP on firms' CSR. However, a test on the moderating effect discloses that a GP and long-term compensation jointly and positively increase the firms' CSR performance. This increase supports the idea that executives with a GP seek to maximize their long-term wealth by approving CSR projects that add value. The results also show that female executives are more likely to promote CSR than their male counterparts, and older executives are less willing to engage in CSR projects.

Practical implications

Adding a GP contractual clause to the executive compensation package could encourage greater engagement in CSR projects. The CEO with a GP will ensure that the firm engages in only value-enhancing CSR projects; this should align the interest of the society (greater firm engagement in CSR) with the interest of the firm (value maximization).

Originality/value

This study contributes to the literature by examining the moderating effect of a GP on the association between CSR and executive compensation.

Citation

Okafor, C.E. and Ujah, N.U. (2020), "Executive compensation and corporate social responsibility: does a golden parachute matter?", International Journal of Managerial Finance, Vol. 16 No. 5, pp. 575-598. https://doi.org/10.1108/IJMF-12-2018-0379