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

Jean McGuire, Jana Oehmichen, Michael Wolff, Roman Hilgers

Research output: Contribution to journalArticleAcademicpeer-review

7 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)375–390
Number of pages16
JournalJournal of Business Ethics
Volume157
Issue number2
Early online date21-Jun-2017
DOIs
Publication statusPublished - Jun-2019
Externally publishedYes

Keywords

  • Behavioral agency
  • CEO compensation
  • Corporate social performance
  • Pay duration
  • Pay-performance sensitivity
  • EXECUTIVE STOCK-OPTIONS
  • FINANCIAL PERFORMANCE
  • STAKEHOLDER MANAGEMENT
  • MANAGERIAL INCENTIVES
  • SHAREHOLDER VALUE
  • RISK-MANAGEMENT
  • PROSPECT-THEORY
  • EMPIRICAL-TEST
  • AGENCY THEORY
  • RESPONSIBILITY

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