The role of CEO's personal incentives in driving corporate social responsibility

Abstract

In this study we explore the role of Chief Executive Officers’ (CEOs’) incentives, split between monetary (based on both bonus compensation and changes in the value of the CEO’s portfolio of stocks and options) and non-monetary (career concerns, incoming/departing CEOs, power and entrenchment) in relation to corporate social responsibility (CSR). We base our analysis on a sample of 597 US firms over the period 2005-2009. We find that both monetary and non-monetary incentives have an effect on CSR decisions. Specifically, monetary incentives designed to align the CEO’s and shareholders’ interests have a negative effect on CSR and non-monetary incentives have a positive effect on CSR. The study has important implications for the design of executive remuneration (compensation) plans, as we show that there are many levers that can affect CEO’s decisions with regard to CSR. Our evidence also confirms the prominent role of the CEO in relation to CSR decisions, whilst also recognizing the complexity of factors affecting CSR. Finally, we propose a research design that takes into account endogeneity issues arising when examining compensation variables.