Responsible Investment

CSR vs. CEO pay: a different level of compensation?

February 21, 2013 | 1 min read

Cai, Jo and Pan, all of whom work within the Department of Finance of Leavey School of Business at Santa Clara University, developed two main hypotheses based on two different theories. They tested an overinvestment hypothesis based on agency theory, which typically emphasizes shareholder wealth maximization; and a conflict-resolution hypothesis based on stakeholder theory, in which the broader interests of all stakeholders of a firm are emphasized with an additional emphasis on ethical and socially supportive decisions by a firm’s management. “Despite the large literature on both CSR and executive compensation, there is no unified theory on the relation between the two. We take two representative but competitive explanations [overinvestment and conflict-resolution]…to determine their relative importance in CSR-executive compensation relation,” they say.

Testing the hypotheses

The research team assembled data from a variety of sources to test their hypotheses. CSR data came from the KLD Stats database (which measures various CSR characteristics of more than 3000 listed US companies between 1995–2009); while CEO compensation data came from the Standard and Poor’s ExecuComp database (1996–2010). Further, they examined board characteristics from the RiskMetrics Director Database, which covers directors of listed US firms (1996–2010).The matching of these data produced a final sample of 11,215 firm-year observations based on 1,946 firms examined between 1996–2010. Their study upholds their conflict-resolution hypothesis, which states: “If the conflict-resolution hypothesis (based on stakeholder theory) is correct, then the CSR engagement inversely influences executive compensation after controlling for confounding factors.”

Results and contribution

Based on their analysis, the Santa Clara scholars conclude that “CEOs in socially responsible firms receive significantly lower pay than CEOs in otherwise similar but socially irresponsible firms.” While they admit that several significant issues are beyond the scope of the paper — including the causality among CSR engagement, executive compensation, and firm value — the team of researchers says that their contribution to the existing literature is twofold. “We are the first to document a robust negative relation between lagged CSR and CEO compensation,” they say, adding “Second, we add to the growing literature on CSR’s role as a means to resolve conflicts among stakeholders…Overall, our results suggest that socially responsible firms are more prudent in determining their CEOs’ compensation levels.”


This article may be reproduced according to our terms of use with attribution (and link, if online) to To be cited as: “CSR vs. CEO pay: a different level of compensation?”, Lloyd Kurtz & the FSinsight team,, February 21, 2013.

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