CSR Compensation Contract and CSR Ratings

Abstract

We examine executive compensation contracts that are directly and explicitly linked to corporate social performance. In particular, we study two types of such contracts, subjective and objective, and the CSR-related variables on which compensation is contracted. We attempt to find which type and underlying CSR variables can most effectively improve CSR ratings. Our results suggest that for objective contracts and subjective contracts, the best performing variables are ethical conduct and social responsibility, respectively. In addition, we study how CSR ratings affect firm performance and risk, and how CSR contracts moderate the effects. We find that both large and small firms with high CSR ratings tend to have a better financial performance in terms of ROA and net profit margin, but the impact of CSR is more pronounced for small firms. CSR contracts in general reduce the impact of CSR ratings on firm performance and risk.