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The effect of adopting the Global Reporting Initiative G4 on CEO

compensation

Name: Ewout Vlug

Student number: 10012117 Thesis supervisor: dr. R. S. Ghita Date: June 25, 2018

Word count: 12126

MSc Accountancy & Control, both specializations Accountancy & Control Faculty of Economics and Business, University of Amsterdam

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Statement of Originality

This document is written by student Ewout Vlug who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

This paper examines the effect of remuneration disclosure guidelines provided by the Global Reporting Initiative (GRI) on the CEO compensation structure. Prior research has shown that the effect of mandatory disclosure regulations have a positive effect on CEO compensation. However, little research has studied the effect of voluntary disclosure guidelines on CEO compensation. I hypothesize that the adaption of the GRI G4 guidelines will positively affect the CEO compensation. Based on the archival data, support was found for a significant increase in cash and total compensation. The data did not support a significant higher pay based on equity payments. Therefore, the structure of compensation is changed based on a higher cash based payment.

Key words: Global Reporting Initiative (GRI); GRI G4 guidelines; CEO compensation;

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Acknowledgements

I would like to express my sincere gratitude to my research supervisor Razvan Ghita for providing insights that helped me in the research process. Furthermore, I would like to thank the Global Reporting Initiative (GRI) for providing me with the Sustainability Disclosure Database. Finally, I would like to thank my friends and family for their support and sharing their views on my research.

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Table of contents

1 Introduction ... 6

2 Literature review ... 9

2.1 CEO Compensation ... 9

2.2 Effect of disclosure of CEO compensation ... 10

2.3 Disclosure requirements of the GRI G4 ... 13

2.4 Effect of Global Reporting Initiative guideline... 14

3 Hypothesis development ... 17

3.1 Cash compensation ... 17

3.2 Equity-based compensation... 18

3.3 Total compensation ... 19

4 Research design ... 21

4.1 Sample and data collection ... 21

4.2 Sample selection and sample period ... 21

4.3 Measurement of variables ... 22 4.4 Statistical model ... 25 5 Results ... 27 5.1 Descriptive statistics ... 27 5.2 Correlations ... 29 5.3 Regression analysis ... 31 6 Conclusion ... 38 References ... 40 Appendix 1: Variables ... 47 Appendix 2: Normality ... 48

Appendix 3: VIF analyzes ... 50

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1 Introduction

The purpose of this thesis is to study the effect of remuneration disclosure guidelines provided by the Global Reporting Initiative (GRI) on the CEO compensation structure. Since the financial crisis of 2008, the public discussion of executive compensations has increased (Bebchuk, Cohen & Spamann, 2010). Ten years after the crisis, the topic of CEO remuneration is still a controversial topic, as we have seen in the debate around the rise of the compensation of Ralph Hamers, the CEO of the NYSE-listed ING (Meijer, 2018). The topic of CEO pay is not only controlled by the banking industry. On 8 March 2018, the shareholders of Walt Disney Co rejected a new executive compensation plan of their CEO, Bob Iger. These issues in modern society are the underlying reason for the debate on the controversial topic of CEO compensation.

Answering the question whether the new GRI G4 guidelines effect the structure of CEO compensation is relevant, because it combines the topic of compensation with the disclosure effect of new guidelines. Following the research of Bebchuk and Fried (2003), research into the topic of CEO compensation is relevant, because compensation arrangements are an indicator of future firms’ performance, therefore disclosure matters. Moreover, following the remuneration report of PWC (2013), the remuneration topic is a sensitive and complex subject in the current society. In the US, a large part of the compensation of CEOs consists of variable components that justify good performance, while bad performance is not justifiable (‘pay for performance, no reward for failure’) (Jensen & Murphy, 1990). The relation between compensation and the guidelines of the GRI guidelines is interesting, because these guidelines are considered the most complete framework concerning transparent information disclosure (Giannarakis & Theotokas, 2011). Secondly, the GRI guidelines are the most commonly used standards in reporting on corporate responsibility issues. What is lacking, however, is quantitative evidence of the effect of adopting voluntarily disclosure guidelines in relation to CEO compensation. This thesis particularly sheds light on the revised G4 guidelines, that introduced additional guidelines on the topic of executive compensation. Therefore the research question of this study is: “How is the CEOs compensation structure affected when organizations report according to the new Sustainability Reporting Guidelines (GRI G4)?”. This research builds on the research of Vigneau, Humphreys, and Moon (2015), who solicit for more research on the practical impact of the guidelines of the GRI.

Current literature on the topic of disclosure of CEO compensation is mainly conducted based on mandatory regulations of disclosure. The research that is conducted on voluntary

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disclosure of extensive CEO pay structures suggest that increasing information disclosure leads to higher compensation contracts. Jiang, Liao, Lin, and Liu (2018) examined the effect of CSRA 2005 voluntary compensation disclosure and found the executive pay tends to convert towards the mean. Bertrand and Mullainathan (2001) indicate that CEOs could capture the pay process and use the new disclosed information to set favorable peer benchmarks. Hayes and Schaefer (2009) state that firms could use the newly disclosed information as a signal of firms' performance, which increases CEO compensation. Finally, Hermalin and Weisbach (2011) conclude that a higher level of disclosure reflects a greater compensation due to the principal-agent problem. Higher disclosure and an increase in disclosure quality cause the CEO to demand a higher fixed compensation, because the compensation is exposed to more risk components. Second, following the research of Liu and Taylor (2008), stakeholders feel well-informed when organizations increasingly disclose CEO compensation on a voluntary basis. This increased transparency in turn boosts the organization’s perceived legitimacy, thereby legitimizing a higher pay for executives in the organizations. By adopting the GRI G4 guidelines, companies voluntarily adopt a more comprehensive way of disclosing compensation practices. However, in response to higher compensation disclosures, some researchers expect the executive pay level to decrease due to a populist response (Jensen & Murphy, 1990).

This thesis, which studies the disclosure effect of the GRI G4 guidelines on the CEO compensation structure, is based on an archival research. Using the company database of the GRI, a sample of 1557 observations is retrieved to conduct a fixed-effect regression on panel data. The results indicate that the compensation structure is affected by the new disclosure guidelines. Based on the results of the sample for the period of 2006 until 2016, cash compensation is 6.8% higher than before the new disclosure guidelines were released. In the light of cash compensation, the results indicate a support for the principal-agent. A possible explanation for this finding could be found in the increased risk component of compensation. The adoption of environmental and social objectives of the firms, causes the variable compensation for the executive to be more risky, which leads to a demand for higher cash compensation (Hermalin and Weisbach, 2011). However, no significant change is found in the equity-based compensation. This findings contradict the result of Liu and Taylor (2008), who describe that an organization’s increased voluntary compensation disclosure leads to an increase in their perceived legitimacy, which in turn legitimizes a higher pay for executives in the organizations. The total amount of CEO compensation is significantly higher after the new

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disclosure guidelines. Based on the logarithm of the total amount of compensation, the total pay package increases by 6.5%. This finding supports current literature of Bertrand and Mullainathan (2001), Murphy (1999) and, Hayes and Schaefer (2009). The structure of CEO compensation is effected by a significant increase in cash compensation, which resulted in an increase of 6.5% in CEO compensation.

Building on the literature, this thesis has a theoretical and empirical value. Theoretically, this thesis could contribute to current literature on CEO compensation by analyzing the effect of compensation structure after the voluntary adoption of more transparent disclosure guidelines. In literature, little research has been conducted on the influence of voluntary disclosure guidelines on CEO compensation. The results contribute to the principal-agent theory and legitimacy theory with respect to compensation practices. Empirically, the results of this research could contribute to the current literature on the topic of GRI guidelines. It is a response to the research of Vigneau et al. (2015), who call for more research on the practical impact of the guidelines of the GRI, which this thesis tries to provide. Overall, this research provides findings for the knowledge gap in current literature regarding quantitative evidence on the effect of voluntary disclosure practices.

The remainder of this thesis proceeds as follows. Section 2 provides background information regarding the GRI, CEO compensation, and the effect of disclosure guidelines. Section 3 describes the hypotheses, which are based on the literature review and section 4 describes the research design of this thesis. The results of the analysis are reported in section 5. Section 6 summarizes the results and provides the main findings of this research.

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2 Literature review

Within academic literature, a few researches are conducted on the topic of disclosure effects on CEO compensation. This chapter describes the organization GRI and the guidelines and effects of disclosure based on recent literature.

2.1 CEO Compensation

In order to understand the topic of executive compensation, first, a few key papers are examined to create a comprehensive view on this matter. Executive compensation is a subject that is studied a lot in different settings. A key article on the topic of compensation is conducted by Murphy (1999). The research summarizes the empirical and theoretical research on executive compensation and provides a comprehensive description of pay practices for CEOs. The author argues that compensation is mostly driven by the size of the firm, and benchmarking with other compensations in the industry. The assumption that CEO compensation is mostly driven by firm size is supported by other and more recent studies (Livne, Markarian, & Milne, 2011; Kostiuk, 1990; Tosi, Werner, Katz & Gomez-Mejia, 2000; Finkelstein & Hambrick, 1989; Lambert, Larcker, & Weigelt, 1991). Contradictory to this finding, Deckop (1988) did not find a significant effect of firm size on CEO compensation. Instead, the author concluded that profitability is positively related to executive compensation and thus a better predictor of CEO compensation. In accordance with Deckop (1988), a significant influence of financial performance on compensation was found (Ittner, Larcker & Rajan, 1997; Finkelstein & Hambrick, 1989). The financial performance in these studies is expressed as the return on assets and return on equity.

A theory, which is important in relation to CEO compensation and discussed in several research papers, is the principal-agent problem. The rise of research on CEO compensation began around the 1980s with the emergence and acceptance of agency theory (Murphy, 1999). Due to the separation of ownership and control in modern firms, a principal-agent problem occurred. The principal-agent problem occurs when agent’s incentives are not in accordance with companies’ principal. This phenomenon appeared because of the existing information asymmetry between shareholders and executives. Due to the existing information asymmetry, many agency problems can occur. Following Jensen and Meckling (1976), the intention of CEOs is to act in their self-interest if they are not properly motivated. Unsupervised executives are more likely to behave opportunistically and have incentives to act in their own interest (Fama, 1980). The information asymmetry resulted in a principal-agent problem, which is

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called the agency problem. The key question in research is how to reduce and mitigate the agency problem. Following Healy and Palepu (2001) it is possible to reduce the information asymmetry by monitoring executives or motiving them in a certain way. Tosi et al. (2000) state in their research that monitoring the behavior of executives is more costly than incentivizing them with components of compensation. Secondly, they conclude that reducing information asymmetry is more efficient for motivating executives in a certain way than monitoring them. According to the agency theory, the CEO of a corporation should be motivated to act in the best interest of the principal (the shareholders). Following Garen (1994), structuring the CEO compensation with appropriate incentives is one obvious way to address this problem.

Incentivizing executives compensation is possible in several ways. Core, Holthausen and Larcker (1999) measure the total compensation as the sum of salary, annual bonus, valuations of stock options, stocks, restricted stocks, non-equity incentive plan compensation, and all other forms of compensation. Within the compensation structure, organizations could incentives executives with a pay for performance plan. Such incentive plans (performance plans) mitigate the principal-agent problem by rewarding the executives with bonus, option, stocks or other plan relating to performance (Core et al., 1999). Thus, executive compensation is viewed as a potential instrument for addressing and mitigating the agency problem.

2.2 Effect of disclosure of CEO compensation

In academic literature, there are a few papers that describe the effect of disclosures to the CEO remuneration package. Boards of organizations have been put under pressure by the public antagonism towards top managements' pay packages to retrain compensation structures in response to pay transparency (Mas, 2016). Following Mas (2016), the disclosure of compensation structure received considerable attention as a low-cost policy that can improve corporate governance and rein in soaring executive compensation. Most of the research on pay transparency is conducted on the topic of mandated disclosure, for example the emendation of the SEC compensation disclosure rule in 2006. This regulation required companies to disclose on firms' executive compensation practices. The researchers Wang, Wang, and Wangering, (2014) found that CEOs no longer receive large bonuses and that CEOs' pay becomes more sensitive to poor performance after the regulation became effective. Other recent research conducted by Paletta and Alimehmeti (2016) examined the relationship between the disclosure regulation of the Sarbanes-Oxley Act and executive compensation. The researchers found that these sections explain a significant amount of executive compensation. In addition, Erhemjamts, Gupta and Tummennan (2009) conducted the same research on financial

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executives and found that level of pay packages are significantly higher after the reform of disclosure. In literature, one can see the positive relation between mandated disclosure and executive compensation.

However, a difference between de mandated disclosure regulation and the remuneration policies for the highest governance body of the GRI is the fact that, under the GRI guidelines, the disclosure policies are voluntary. Although companies in the US have the obligation to disclose their compensation under the regulation of the SEC, companies that voluntarily issue a GRI report must add and comply with the additional remuneration policies of the GRI.

Within academic literature, little research has been conducted in the field of voluntary disclosure of CEO compensation structures. A recent study of Jiang, Liao, Lin, and Liu (2018) examined the effect of the CSRA 2005 voluntary compensation disclosure rule in China. The researchers found that executive pay has tended to converge toward the mean. A result of the new disclosures was that an executive, whose compensation was below the mean, generally received a higher pay increase in the subsequent year. In general, the researchers found a positive relation involuntary disclosure and executive compensation packages. Another research, conducted by Chung, Judge and Li (2015), was based on the effects of voluntary disclosures to executives’ compensation and firm value in Taiwan. An interesting finding of the research is that comprehensive voluntary disclosure is positively related to executive compensation, resulting in higher compensation structures for executives. Another finding of the researchers is that, when firms engage in highly transparent information disclosure, the executive compensation is positively associated with firm value. In sum, both papers suggest that comprehensive disclosure of information provides a signal of better governance structures due to fewer agency problems (Sheu, Chung, Liu, & Yang, 2010). Mas (2016) summarizes why these findings show a positive relation. First, due to more transparency, CEOs could capture the pay process and use the newly disclosed information to set favorable peer benchmarks (Bertrand & Mullainathan, 2001). The finding that compensation is driven by benchmarking is also supported by the research of Murphy (1999). Second, firms could use the newly disclosed information as a signal of firms' performance, which increases CEO compensation (Hayes & Schaefer, 2009). In case of increased information disclosure, Djankov , La Porta, Lopez-de-Silanes and Shleifer (2008) stated that a CEO is paid more than what is legitimated by the performance of their firm due to the fact that accountability is improved. The payment to a CEO is than regarded a pay for performance. Hermalin and Weisbach (2011) have conducted a research on the effect of information disclosure on corporate governance. In

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their research, they conclude that a higher level of disclosure reflects a greater compensation. Secondly, the authors conclude that in case of disclosures of a higher quality, the rise in compensation continues to grow. The authors assign this finding to the agent-principal problem. Due to higher disclosure and increase in disclosure quality, the CEO demands a higher fixed compensation, because the compensation is exposed to more risk components. Djankov et al. (2008) focus on a new regulation to disclose the total amount of CEO pay. The finding that the CEO is paid more due to the fact that accountability is improved is in accordance with the legitimacy theory, which is described in the research of Dowling and Pfeffer (1975). Suchman (1995) defines legitimacy as "a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs, and definition". In the research of Wilmshurt and Frost (2000), the authors emphasize the underlying notice of corporate legitimacy. In their view, stakeholders act in a way that is acceptable. Moreover, people within an organization carry out the activities in the way that is deemed acceptable by the community. In the business of the organization, the corporation has to manage the organization in an acceptable manner in order to retain perceived legitimacy. By adopting voluntary compensation disclosure, stakeholders feel well-informed in a transparent way, which increases the organization’s perceived legitimacy, thereby legitimizing a higher pay for executives in the organizations (Liu and Taylor, 2008). Liu and Taylor (2008) conducted a research on the topic of the legitimacy management tactics in response to a potential threat or certain events. The authors expected an excessive increase in equity-based payment to executives to repair the perceived legitimacy by voluntary disclosing this information. In that way, greater disclosure of remuneration policies and strategies could be an important tactic of the management to justify higher equity-based payments. The authors concluded that, by voluntarily disclosing compensation, organizations increase their perceived legitimacy, which justifies a higher pay for executives within these organizations. In addition to the legitimacy theory, Inchausti (1997) found that profitable firms would disclose more detailed information in order to support the compensation payments. Melis, Gaia, and Carta (2015) found that the increase of voluntary disclosures leads to an increase in legitimacy for the organization. The increase of organizations' legitimacy would provide opportunities for organizations to raise the executives' compensation. The authors found support for this finding based on organizations in the UK and Italy. In these case studies, the disclosed information on remuneration packages has led to a significantly higher increase in share-based payments compared to fixed payments. These findings support the concept of the legitimacy theory, as legitimacy increased due to voluntary disclosures.

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Within academic literature, researches with opposite findings can be discovered. Mas (2016), finds that, in the public sector, transparency on compensation leads to lower compensations for top managers. With the new regulation on CEO-to-Worker pay ratio, the SEC aims to reduce the compensation gap between executives and average workers. In addition, Jensen and Murphy (1990) speculated that there could be a populist response to disclosing a higher level of compensation, which could contribute to lower executive pay levels. However, in academic research, there is a lack of quantitative evidence for this phenomenon. In conclusion, most of the research suggests a rise of compensation after disclosure of compensations structures.

2.3 Disclosure requirements of the GRI G4

The financial crisis has drawn attention on the topic of executive compensation. Studies show an explanation for the high level of compensation and argue that structure of compensation may have contributed to corporate scandals and the recent financial crisis (Faulkender, Kadyrzhanova, Prabhala and Senbet, 2010). Following the debate of CEO compensation structures after the economic crisis in 2008 (Schneider, Kallis, & Martinez-Alier, 2010), the GRI revised the disclosure guidelines to their new G4 guideline.

In the previous version of the GRI, one disclosure requirement was adopted on the topic of remuneration of executives. Following this guideline, an organization had to adopt a link between the compensation of executives and the performance of an organization. In the aftermath of the crisis, the global reporting initiative received consistent feedback from the public and organizations worldwide to review their compensation guidelines in a new format (GRI, 2014). The GRI released the new G4 framework in 2013 and improved its policies regarding the disclosure of remuneration of the highest executives body. Since the last GRI G4 guideline, the determination of the pay structure related to sustainability goals has been integrated into the annual report. Reporting on remuneration policies according to the GRI guideline is voluntary. However, reporting in accordance with these policies enables organizations to show their commitment to improving environmental, social and sustainability goals remunerating their higher governance body. The new disclosure focus is to ensure that remuneration arrangements support the strategic aims and sustainability goals of the organizations (GRI, 2014). By embracing these sustainability guidelines, organizations create perceived legitimacy within society (Suchman, 1995).

In contrast to the previous guideline, which was based on one principal only, the GRI G4 guidelines consist of five disclosure principles. The new principles of the GRI G4 guidelines

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start with a report of the remuneration policies relating different forms of remuneration (fixed pay, variable pay, sign-on bonuses, termination payments, clawbacks and retirements benefits). These types of remuneration have to be related to the organizational economic, environmental and social objectives. The difference with the previous guideline is that all forms of compensation must be related to the three types of objectives of the organization. Also, in addition to the older guideline, organizations have to report on their clawback-policies. Following the second principle, the organization must report on the process for determining remuneration. More specifically, the company must report on whether consultants were involved in determining remuneration and whether they were independent from the organizations. According to the third principle, the organization must report on how stakeholders' views and sought are taken into account. The last two principles are ratios based on the remuneration reward. The first ratio is the annual total compensation for the organizations' executives to the median annual total compensation for all employees. The second ratio is the percentage increase in annual total compensation for the organizations' executives to the median percentage increase in annual total compensation for all employees. The SEC also added the pay ratio between the top executives and the companies' employee median salary to their regulatory policies. In contrast to the GRI G4 guidelines, under the regulation of the SEC, companies must adopt this ratio in their annual report from 2018 onwards, while the GRI G4 guidelines had already been effective in 2013.

2.4 Effect of Global Reporting Initiative guideline

As mentioned before, adopting the global reporting initiative guidelines is voluntary. In addition, following the SEC, any organization is obliged to disclose its CEO compensation in a DEF 14A form in the SEC filing database. The database contains all information about firms and is publicly accessible, stake- and shareholders included. The framework of the global reporting initiative is therefore an addition to the mandatory reporting regulations on executive compensation.

The effect of the different disclosure guidelines is studied in some papers as stand-alone issues to compensation. The researchers Kolk and Perego (2014) stated that in the current society, there is hardly any comprehensive implementation of sustainability goals into corporate bonus schemes. However, some leading companies have started to disclose how their sustainability pillars relate to executive compensation. Recent literature lacks quantitative conclusions on the effect of disclosure of sustainability on executive compensation. The effect of voluntary disclosing clawback policies in compensation contracts is positively correlated to

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executive bonus contracts of the CFO (Kroos, Schabus, & Verbeeten, 2018). This finding is supported by Chen, Greene and Owers (2014), who concluded the disclosing clawbacks show a positive relationship with CEO compensation. The researchers Murphy and Sandino (2010) conducted a research on the relation between the disclosure requirements of compensation consultants and CEO compensation levels. The researchers found that CEOs receive a higher compensation when the organization discloses its consulting practices in both the US and Canada. Lacmanović (2013) studied the effect of pay ratios on performance of the company. She concludes in her research that the disclosure of pay ratios improves the firms’ and individuals’ performance. However, the current literature lacks quantitative conclusions on executive compensation based on the new pay ratio, due to the fact that organizations are not obliged to report on the ratios. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, disclosing pay ratios are mandatory from 2018 onwards. The overall disclosure of compensation practice is studied by Schmidt (2012). In this research, he found evidence for an increase of 5.9% of total compensation in relationship to the increased disclosure setting. This increase was mostly driven by the viable compensation, which increased by 11.2%. The research was conducted for companies that were listed on the DAX index.

The effect of disclosing GRI guidelines can not only be found in academic literature, but also in annual reports. Following the GRI (2014), changes in disclosure guidelines support an organization to show its commitment to the sustainability goals. In practice, several annual reports could be found to support this statement of the GRI. In the annual report of Dow Chemical (2016), the executive is held accountable for environmental, health and safety objectives through the individual performance process. Also, the firm itself mentioned that the annual cash incentive of executives was significantly impacted. The option awards for executive officers at Intel (2015) are measured based on the performance of financial performance, product development, corporate responsibility and environmental sustainability goals. Following the annual report, the corporate responsibility approach is their commitment to transparency. One of the sustainability goals Intel aims to achieve is to protect, restore and promote sustainable use of terrestrial ecosystem, manage forest, combat desertification, halt reserve and degradation, and halt biodiversity loss. Another reporter on the topic of sustainable business practices linked to remuneration policies is PepsiCo, Inc. In its annual report (2015), PepsiCo considers sustainability issues in its oversight in the areas of capital allocation, supply chain, public policy, talent retention and portfolio innovation. Executive officers receive an annual performance-based compensation, which is based on sustainable innovation,

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sustainable growth, and tackling environmental issues. These organizations follow the GRI Guidelines on the topic of remuneration. However, one can ask oneself whether these statements are effective in practice. The GRI Guidelines aim to promote sustainability reporting based on the core indicators of the company and are at the same time set in place for various stakeholder groups who demand context-specific information (Barkemeyer, Preuss & Lee, 2015). The authors conclude that the effectiveness of the GRI Guidelines is successful in terms of promoting the sustainability reporting issues. However, if materiality is not defined, the GRI Guidelines are less effective to the stake- and shareholders. Bloom and Carroll (2015) conducted a study on the GRI Guideline and the remuneration policies. Based on their case studies they argue that, although the GRI could be useful for sustainability disclosures, its effects are limited, as company reports still largely represent the positive features of their sustainability efforts. The guidelines lack industry-specific issues, because of the generalization of the principles, which leads to self-reported, possibly biased information.

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3 Hypothesis development

Based on the literature review about the relation between disclosure guidelines and compensation, this section provides the development of the hypotheses.

3.1 Cash compensation

As mentioned before, companies that report in accordance with the GRI G4 guidelines have to disclose how the compensation packages of their CEO relate to the sustainability pillars. Secondly, organizations have to report on their clawback policies in the compensation packages. They moreover have to report on the determination process of remuneration, and have to add compensation ratios. In other words, organizations have to be more transparent in the determination of pay packages and should link the remuneration to sustainability goals.

By linking the new guidelines to the literature, the principal-agent model could explain the variation in the CEO pay package structures. The model predicts that CEO pay packages provide incentives to structure the contracts that maximize shareholders’ welfare. However, the CEO is risk-averse, meaning that agents’ demand for a safer income is higher than income that is more risky. Hermalin and Weisbach (2011) state that executives are risk-averse if compensation packages are sensible to new information disclosure requirements. In their research, providing a prediction from the executives‘ perspective, the principal-agent problem predicts that a rise in risk within the amount of compensation will lead to a higher demand of salary by the agent. As a consequence, CEO compensation is exposed to greater risk due to new models of disclosure. In line with their prediction, the authors found that greater disclosure requirements tend to rise executive compensation in terms of salary. The remuneration policy must be related to economic, environmental and social objectives. The adoption of environmental and social objectives of the firms causes the variable compensation for the executive to be more risky, which leads to a demand for higher cash compensation.

In literature the legitimacy perspective is used to explain the difference in compensation practices. Following the legitimacy theory, the effect of disclosure on cash compensation can be explained in two directions. Firstly, as the research of Hambrick and Finkelstein (1995) suggests, CEOs must have some legitimate basis for increasing their salary. The additional disclosure requirements of the GRI support executives to create such perceived legitimacy, which enables them to raise cash based compensation (Wilmshurt & Frost, 2000). Contradictory, the study of Wilmshurt and Frost (2000) concludes that a way to create perceived legitimacy is not to reward in salary, but by means of equity compensation. This is

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supported by Liu and Taylor (2008), who argue that greater disclosure of remuneration policies and strategies could be an important tactic for management to justify higher equity-based payments. Greater disclosure of remuneration policies is not found in an increase of fixed compensation.

In sum, from the principal-agent theory one can expect an increase in cash compensation when the GRI G4 guidelines are followed. Moreover, the legitimacy theory suggests the same effect. However, in some researches, no increase in cash compensation was found. Combining the idea of both the legitimacy theory and the agent-principal theory, an increase in cash compensation can be reasonably expected. Therefore, the first hypothesis of this research is:

Hypothesis 1 (H1) = The total amount of cash compensation of CEOs is higher for

companies that report in accordance with the Global Reporting Initiative G4 guidelines. 3.2 Equity-based compensation

Equity-based compensation is another way to compensate the CEO. Equity based payments are seen as a measure to align the interests of managers and shareholders. The equity-based pay packages consist of the grant of options, stocks and restricted stocks awards. Researchers moreover state that equity grants are a major contributor to executive total compensation packages. US-based organizations have a long-standing history of compensating CEOs with equity (Ofek & Yermack, 2000). These components of compensation are mainly used to resolve agency problems between the agent and the principal. From the agency theory perspective, disclosure of performance-related compensation helps to align the interest of the shareholder and the executives (Sheu et al., 2010). In addition, Hermalin and Weisbach (2011) conclude that greater corporate disclosure is a way to reduce agency problems within a firm. Thus, the relationship that is supported by literature, is that equity-based components of compensation help to align the agent activities with the interest of the principal (Jensen & Meckling, 1976). However, from an agency perspective, there is no evidence for an increase in equity-based compensation after new disclosure guidelines.

The legitimacy theory is often used by academics to explain incentives of corporate voluntary disclosure (Perrow, 1970; Dowling & Pfeffer, 1975; Meyer & Rowan, 1977; Ashforth & Gibbs, 1990; Powell & Dimaggio, 1991). Although the GRI guidelines are globally embraced, including by the world’s 250 largest organizations, reporting in accordance with these guidelines is still to be done on a voluntary basis. In this regard, the application of the

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legitimacy theory in variable compensation components is relevant. In a corporate setting, Wilmshurt and Frost (2000) define legitimacy as “activities which are acceptable and within the boundaries of what is deemed acceptable by society”. Legitimacy is achieved when organizations adopt proper organizational structures and practices that comply with social norms and values (Meyer & Rowan, 1977). Liu and Taylor (2008) conducted a research on the topic of legitimacy theory and executive’s remuneration packages. The researchers describe that there is a widespread interest from corporate share- and stakeholders for compensation contracts, because of the established belief that the structure of the contract can mitigate the conflict of interest between managers and shareholders. Also, this issue is interesting for an organization in relation to society, of which the latter demands corporate responsible transparency in annual reports. The research of Schmidt (2012) suggests that if organizations are more transparent, the compensation of executives is 5,9% higher than in previous years. This increase is mostly driven by variable determinants of the total compensation, which is 11.2%. This effect could be explained by the legitimacy theory (Liu and Taylor, 2008) because due to voluntary compensation disclosure, organizations increase their perceived legitimacy, which legitimizes a higher pay for executives in the organizations. In the section ‘remuneration policies for the highest governance body and senior executives’, firms state how the compensation is determined. Due to more transparency in the disclosure of compensation objectives, the organization legitimizes itself with a higher variable compensation. This argumentation leads to the second hypothesis:

Hypothesis 2 (H2) = The total amount of equity compensation of CEOs is higher for

companies that report in accordance with the Global Reporting Initiative G4 guidelines. 3.3 Total compensation

Together, both hypotheses and theories affect the total amount of compensation, which thus increases after the adoption of the GRI G4 guidelines. In addition, there is evidence in literature that predicts that the total amount of compensation will increase after greater information disclosures. Bertrand and Mullainathan (2001) conclude the CEOs could capture the pay process and will use the new disclosed information to set favorable peer benchmarks. Linking this finding to the research of Murphy (1999), who stated that benchmarking leads to greater compensation packages, one can conclude that setting favorable peer benchmarks will increase the total amount of compensation. Hayes and Schaefer (2009) state the firms could use the CEO compensation as a signal of financial performance. Additional remuneration disclosures provide a signal towards society that the performance of the company is sufficient to pay a

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higher amount of compensation to its CEO. Both hypotheses on cash and equity compensation, and the evidence from literature lead to the following hypothesis:

Hypothesis 3 (H3) = The total amount of compensation of CEOs is higher for

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4 Research design

In order to study the effect of the Global Reporting Initiative on CEO compensation and test the hypotheses, an archival research was conducted. In the first section, the sample and selection of the data is described. Second, the variables and control variables are explained. The third section presents the research model in order to answer the research question.

4.1 Sample and data collection

To examine the effect of sustainability guidelines on CEO compensation, several databases are used. First, the Global Reporting Initiative provided a database containing information about all sustainability and integrated reports from 1999 until 2017. The database is specified by year and contains variables that inform about which GRI guideline is used by each firm. To construct the sample, first the organizations were identified that used a ‘GRI G4’ format in the past years. Thereafter, relevant information was retrieved for these organizations both prior to and after using the GRI G4 guidelines.

The data for CEO compensation is retrieved from Execucomp, which is available on Wharton Research Services (WRDS). The data in this database is directly collected from each company’s annual proxy (DEF 14A SEC form). The database only contains data from public and private companies in the US, because these firms are obliged to disclose their executive compensation in a DEF 14A format. Therefore, this study is based on information about the USA. The other variables included in this research are the control variables. The variables are retrieved from the Compustat North America database, the Institutional Shareholder Services (ISS), and the U.S. Bureau of Economic Analysis (BEA). The first two databases contain fundamentals and market information on active and inactive publicly held companies. The BEA is a government agency, which provides official macroeconomic and industrial statistics. 4.2 Sample selection and sample period

In this study an initial sample of the years 2006 – 2016 are used to examine the effect on compensation structure. Since the GRI G4 guidelines were introduced in 2013, this year is considered as the transformation year for companies. For example, in 2013 the total amount of GRI G4 reports was 12 compared to 110 in 2014. The compensation data in 2013 is integrated in the total sample to create a comprehensive sample of observations. This study does not make use of data prior to 2006, because in this year the GRI G3 guideline became effective, which led to an increase in followers of the guidelines. The fiscal year of 2017 is not included in this

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study, because the GRI database does not contain all the relevant information about organizations’ sustainability disclosures.

After combining the years 2006 – 2016, the initial sample is 2,732. 445 observations are removed from the sample, because these observations are within an organization that is not-listed. Non-listed firms do not have the obligation to disclose their executive compensation. Moreover, these firms do not have the possibility to grant option, nor stocks. The missing values and economically incorrect values need to be removed from the sample in a future stage of this study. Finally the financial institutions (SIC codes 6000-6999) are excluded from the sample, because rations and valuations metrics for financial institutions are not comparable to other firms (Efendi, Srivastava & Swanson, 2007). Following the research of Ely (1991), compensation of executives in this industry is not representative for other firms.

Table 1 Sample

Number of observations

Initial Sample 2,732

Removing non-listed companies 445

Removing missing values 705

Removing financials 8

Final sample 1,557

Of the final sample in table 1, the number of GRI G4 report observations is 267, which is 23.08% of the sample. The sample contains 154 unique organizations. Combining the GRI database with the compensation data from Execucomp, a unique dataset is created for this research. The final sample contains compensation information from the US in each industry. 4.3 Measurement of variables

In this section, the variable to conduct this study will be introduced. In this research the effect of GRI G4 on CEO compensation structure is examined. First the dependent variables of this study, namely cash, equity and total compensation, will be discussed. Thereafter, the independent variable GRI G4 and the control variables will be explained.

To test the hypotheses, the dependent variable is split into cash compensation, equity compensation and total compensation. These measurements are based on the research of Brick, Palmon and Wald (2006), who conducted a research on executive compensation and performance. Following the research of Brick et al. (2006), cash compensation is measured based on the sum of salary and annual bonus. Salary is measured as a component that is fixed

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at the beginning of each year. Annual bonus is mainly based on the financial performance of the company (Core et al., 1999). Equity compensation is the sum of grants of restricted stock, value of option grants and phantom stocks. The valuation of stocks and option is based on the FAS 123(R) financial accounting regulation by the Financial Accounting Standards Board (FASB). It requires firms to choose between Black-Scholes, Lattice models, or Monte Carlo Simulation model. Phantom stocks are a non-equity incentive amount, which allow the management to benefit from shares price increase without receiving stocks of the company. Phantom stock grants are valued as restricted stocks. Total compensation is defined as the sum of salary, bonus, the total value of restricted stock granted, the total value of stock options granted using a Black–Scholes model, long-term incentive payouts, and all other payments (Core et al., 1999).

The proxies for compensation are taken with a natural logarithm of all forms of compensation. This is recommended by Finkelstein and Hambrick (1989), by taken the logarithm of compensation, heteroscedasticity is reduced. In addition, the structure is measured by differences in percentage. Finally, the compensation is winsorized based on the research of Faulkender et al. (2010), the data is winsorized at a 1st and 9th percentile to mitigate the skewness of the distribution. Based on the research of Mas (2016) and Gerakos, Piotroski and Srinivasan (2011), I choose to determine the dependent variables as ln(cash_comp), ln(equity_comp) and ln(total_comp).

The dependent variable of this research is GRI G4. GRI G4 is measured with a dummy variable containing a 1 if the company discloses a GRI G4 report and a 0 if the company discloses a previous version of the GRI guideline or a non-sustainability report. The dummy variable is retrieved from the GRI database and merged by hand into the dataset for this study.

In this study, control variables are included to test whether the effect of disclosing a GRI G4 report on CEO compensation is affected by other factors. A comprehensive set of control variables is used based on the research of Berrone and Gomez-Mejia (2009). The researchers state that the two most widely recognized determinants of CEO pay are firm size and firm performance. The research of Wright, Kroll, and Elenkov (2002) supports the argument that firm size influences CEO compensation. Consistent with this finding, Gibson and Stillman (2009) found the big firms pay a greater compensation. Mehran (1995) concluded in his research that firm performance is positively related to equity-based compensation. Thus, both firm size and performance could be variables that influence the compensation of executives. In the research of Tosi et al. (2000), the authors use the same indicators as control variables.

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Following this study, firm size is measured based on the total value of the assets. The studies measure the total assets value as a logarithm to mitigate the variability of the data and make data conform more closely to the normal distribution. Firm size is measured as a natural logarithm of fiscal-year-end total assets, and is retrieved from Compustat.

Second, the performance measures are divided into three firm characteristics. The first performance indicator is the Tobin’s Q ratio. This ratio controls the study of the presence of growth opportunities, because the ratio takes the market value into account (Berrone & Gomez-Mejia, 2009). The Tobin’s Q ratio is calculated by the sum of the market value of equity and the book value of debt (defined as the difference between the book value of assets and the book value of equity), divided by book value of assets (Hartzell & Starks, 2003). Another performance indicator is measured based on the annual return on equity (ROE). Finkelstein and Hambrick (1989) and Sanders and Carpenter (1998) measure ROE by calculating fiscal-year-end net income over shareholder’s equity. The third firms’ performance indicator control variable is the return on assets (ROA). Following the research of Murphy (1999), firm compensation policies often explicitly tie compensation to ROA. Based on the theoretical models (e.g, Banker & Datar, 1989), the last firm characteristic that effects compensation (and the level of expected compensation) could be firm risk. Therefore, in this study the leverage ratio is used as control variable to hold results constant. These firms’ characteristics are retrieved from Compustat.

Based on the literature, governance characteristics could influence the structure of CEO compensation. Core et al. (1999) find that an increase of one person in the board has a positive effect of $30,601 increase in the total CEO compensation. Therefore, the total number of directors of the board is a control variable. Researchers Berrone and Gomez-Mejia (2009) also used board size as a control variable. A second governance characteristic is the percentage of independent board members. Pfeffer (1981) argues that internal board members are more loyal to the managements and that therefore the compensation of the CEO is affected by a high percentage of internal directors. The board independence is measured by the percentage of outside directors in the board.

The last control variable is based on a macroeconomic measure, which is the change in the US annual gross domestics product (GDP). This variable is used to control for changes in compensation due to a macroeconomic shift in national wealth (Paletta & Alimehmeti, 2016; Boschen, Duru, Gordon & Smith, 2003; Tosi & Greckhamer, 2004). In appendix 1, a summary states how variables are calculated and where the information is retrieved from.

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4.4 Statistical model

In order to answer the research question, a regression model will be used to answer the hypotheses. Three hypotheses are stated in the hypothesis section. These will be answered using the following regression formula:

Ln(cash_comp/equity_comp/total_compit) = αi + β1*G4it + β2*SIZEit + β3*TOBINit + β4*ROAit + β5*ROEit + β6*LEVit + β7*B_SIZEit + β8*B_INDit + β9*GDPit + ∑Year_dummies+

∑Sector_dummies + Uit

Where:

Ln(cash_comp) Cash compensation

Ln(equity_comp) Equity compensation

Ln(total_comp) Total compensation

αi The parameters to be estimated, where i = n

β Constant

G4 Dummy variable of GRI G4 report: 1 if G4 report is issued, 0 if not

SIZE Natural logarithm of fiscal-year-end total assets

Tobin Fiscal-year-end market value of equity and the book value of debt, divided by book value of total assets

ROA The fiscal-year-end earnings before interest and tax to total assets

ROE The fiscal-year-end net income over shareholder’s equity

LEV The fiscal-year-end total debt over total assets

B_SIZE Total number of directors in the board

B_IND Percentage of independent boards members

∆GDP The annual percentage change in the US gross domestic product

Year_dummies Set of dummier for year

Sector_dummies Set of dummies for sector based on the SIC numbers

Uit Error term

The regression model is based on panel data retrieved from different databases. For panel data within a OLS regression, fixed or random effects are used to control for heterogeneity

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within the sample have to be used. The Hausman Test (1978) is conducted to check whether fixed or random effects are used in the regression. Based on this test, a p-value lower than 0.05 indicates the use of fixed-effects, and above 0.05 random effects are sufficient. Based on the findings of the Hausman Test it is appropriate to use a fixed-effect model for cash, equity and total compensation. Fixed-effect regression is used to control for omitted variables that vary across entities, but are not constant over time. Entities have its own individual characteristics that may influence the predictor variables of this research. The fixed-effect panel regression is used for studies that vary over time, industries, and companies. Following prior studies, analyzing the change in CEO compensation requires industry-specific-, and time-effects in the regressions (Ozkan, 2011). The standard estimation is clustered at the firm level. The same model is used by Erhemjamts et al. (2009) and Ozkan (2011).

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5 Results

In this chapter the descriptive statistics, correlation, and regression results are presented and analyzed by using the model of Erhemjamts et al. (2009). Included in this chapter are robustness regressions that are conducted to assure the quality of the core regression model. 5.1 Descriptive statistics

First, the sample of this study is checked for normality. In appendix 2 the histogram plots of cash-, equity- and total compensation are stated to check for normality. Second, the kurtosis and skewness are evaluated to check if the values are between standards. The research of West, Finch, and Curran (1995) proposed a reference of a skewness value >2.1 and kurtosis value of >7.2 when normality is not assured. Other researches state that skewness need to be between -2 and -2, and kurtosis between -3 and 3 (McDonald & Bookstaber, 1991). Table -2 shows the values of skewness and kurtosis of the different types of compensation.

Table 2: normality

Statistic Cash compensation Equity compensation Total compensation

Skewness -0.256 -0.558 -0.219

Kurtosis 2.858 2.392 2.346

The independent variable (GRI) is a dummy variable and has a skewness of 1.098 and a kurtosis of 2.207. The skewness for al compensations is negative, which indicates that the left tail of the distribution is longer. The values of kurtosis are above 2 for all compensations, which means that there are observations in the ends of the distribution. Based on both the histogram plots and the values of skewness and kurtosis, there is no evidence to doubt the normality of this study.

In table 3 the descriptive statistics are presented for each variable that is part of the regression equation. Based on the independent dummy variable, the statistics are divided in three panels: the full sample, organizations with a non-G4 report, and G4 reporters. The total amount of observations is 1557, of which 1290 are non-G4 reporters, and 267 G4 reporters. One can see an increase in compensation of cash, equity and total compensation in panel C compared to panel B, indicating an increase in compensation after the adoption of the G4 guidelines.

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Table 3: Descriptive statistics

Descriptive statics for compensation, GRI, firm and governance characteristics, and macroeconomic measurements for 1577 firm-year observations of 154 unique firms, for the period 2006-2016.

Variable Mean Median Std. Dev. Min Max

Panel A - full sample (N=1557)

Ln Cash Compensation 14.888 14.948 .667 13.190 16.426 Ln Equity Compensation 15.515 15.590 .770 13.116 17.445 Ln Total Compensation 16.025 16.066 .672 13.934 17.679 GRI G4 Report .171 0 .377 0 1 Ln Total Assets 16.405 16.340 1.355 12.326 20.497 Tobin’s Q 1.414 1.140 1.080 0 15.307 ROA Value .063 .067 .091 -1.227 .527 ROE Value .233 .170 2.392 -21.235 70.385 Leverage Ratio .255 .233 .160 0 1.664 Board Size 10.721 11 2.024 4 19. Independent Board % .846 .86 .118 .380 1.000 Change in US GDP 0.032 0.037 0.019 -0.020 0.058

Panel B- Non G4 sample (N=1290)

Ln Cash Compensation 14.870 14.936 .683 13.190 16.426 Ln Equity Compensation 15.465 15.526 .788 13.116 17.445 Ln Total Compensation 15.986 16.012 .690 13.934 17.679 GRI G4 Report 0 0 0 0 0 Ln Total Assets 16.364 16.304 1.359 12.326 20.497 Tobin’s Q 1.391 1.128 1.076 0 15.307 ROA Value .065 .068 .081 -.632 .527 ROE Value .264 .173 2.494 -17.391 70.385 Leverage Ratio .244 .220 .154 0 .798 Board Size 10.692 11 2.059 4 19 Independent Board % .832 0.83 .114 .380 1 Change in US GDP 0.031 0.037 0.020 -0.020 0.058 Panel C - G4 sample (N=267) Ln Cash Compensation 14.976 14.994 .572 13.336 16.366 Ln Equity Compensation 15.757 15.835 .627 13.463 17.445 Ln Total Compensation 16.212 16.249 .545 14.351 17.637 GRI G4 Report 1 1 0 1 1 Ln Total Assets 16.607 16.512 1.319 12.977 20.015 Tobin’s Q 1.527 1.231 1.094 .084 6.490 ROA Value .051 .061 .129 -1.227 .485 ROE Value .084 .160 1.820 -21.235 8.472 Leverage Ratio .312 .294 .177 .001 1.664 Board Size 10.861 11 1.839 5 16 Independent Board % .913 1 .114 .450 1 Change in US GDP 0.034 0.039 .682 0.027 0.044

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5.2 Correlations

Before running the panel regression on compensation, the variables are tested for multicollinearity. A coefficient above 0.800 indicates that there is multicollinearity between two variables, meaning that the predictors are correlated with other predictors (Tay, 2017). Table 4 shows the Pearson Correlation matrix in detail. The correlation between equity compensation and total compensation is 0,872. This implies a correlation between the variables. This correlation can be reasonably expected, because equity compensation is an element of total compensation. The coefficient for cash compensation is also significant, but not as much as equity compensation in relation to total compensation. This means that total compensation is driven more by equity based compensation than by cash compensation. Furthermore, no coefficients are higher than 0.8, which means that no multicollinearity is observed between the variables. However, one can see a high coefficient between board size and the total assets, indicating that bigger firms have more board members. This correlation is expected based on the research of Guest (2009), who conducted a study in there is an effect of board size on firm performance.

As expected, a significant correlation between GRI G4 reporters, and equity and total compensation is observed in table 4. However, there is no significant relation between GRI G4 reporters and cash-based compensation. Furthermore, in the correlation table, a relation between ROA, Tobin’s Q, Leverage and Board size on the one hand, and compensation on the other hand can be discovered. Following the table, compensation is not correlated with ROE, percentage independent board members, and change in GDP.

Second, a Variance Inflation Factor (VIF) analysis is conducted for the different hypotheses, which is presented in appendix 3. The VIF-value is the ratio that measures the impact of collinearity among the variables within a regression model. This test is based upon the research of Chen, Huang and Wei (2013), who conducted a research on the topic of chief executive pay packages and their college degree. In their analysis, no values higher than 5, and therefore no significant multicollinearity are found. Based on both analyses, one can therefore conclude there is no multicollinearity problem.

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Table 4: Pearson correlation

*, **, *** indicate if correlation is statistically significant at the α = 0.10, 0.05, and 0.01 levels, respectively.

1 2 3 4 5 6 7 8 9 10 11 12

Dependent (1) Ln Cash Comp 1

(2) Ln Equity Comp 0.486*** 1 (0.000)

(3) Ln Total Comp 0.712*** 0.872*** 1 (0.000) (0.000)

Independent (4) GRI G4 Report 0.060** 0.143*** 0.127*** 1

(0.018) (0.000) (0.000)

Controls (5) Ln Total Assets 0.516*** 0.652*** 0.674*** 0.068*** 1

(0.000) (0.000) (0.000) (0.007) (6) Tobin’s Q 0.034 0.025 0.046* 0.048* -0.227*** 1 (0.181) (0.316) (0.069) (0.060) (0.000) (7) ROA Value 0.158*** 0.036 0.082*** -0.057** -0.044* 0.448*** 1 (0.000) (0.151) (0.001) (0.024) (0.085) (0.000) (8) ROE Value 0.044* -0.022 0.008 -0.029 0.012 -0.006 0.065** 1 (0.086) (0.393) (0.757) (0.260) (0.624) (0.810) (0.011) (9) Leverage Ratio -0.078*** -0.021 -0.025 0.161*** 0.063** -0.237*** -0.278*** 0.000 1 (0.000) (0.399) (0.331) (0.000) (0.013) (0.000) (0.000) (0.998) (10) Board Size 0.360*** 0.372*** 0.407*** 0.032 0.534*** -0.117*** 0.036 -0.002 0.020 1 (0.000) (0.000) (0.000) (0.213) (0.000) (0.000) (0.161) (0.929) (0.419) (11) Independent B 0.023 0.093*** 0.049* 0.258*** 0.096*** -0.013 -0.034 -0.026 0.095*** -0.104*** 1 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.610) (0.532) (0.001) (0.000) (12) Change GDP 0.067*** 0.082** 0.085*** 0.055** 0.027 0.084*** 0.087*** 0.012 0.000 -0.001 -0.062** 1 (0.007) (0.001) (0.000) (0.029) (0.290) (0.001) (0.001) (0.625) (0.985) (0.971) (0.147)

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5.3 Regression analysis

In this section, the results of the research are discussed based on the regression models. As stated in the research design, the regression result are divided between the different forms of compensation. In the first regression, a fixed effects regression on cash compensation is specified in table 5.

Table 5: Cash compensation

Regression on cash compensation (cash_comp)

(1) (2)

Variable cash_comp cash_comp (C, R)

Report in G4 format 0.064 0.068* (0.162 (0.089) Ln(total assets) 0.259*** (0.000) Tobin’s Q 0.088** (0.025) ROA value 0.806*** (0.001) ROE value 0.002 (0.553) Leverage -0.257 (0.145)

Size of the board -0.009

(0.364) % independent directors 0.019 (0.890) ∆GDP -0.002 (0.936) Constant 14.864*** 10.615*** (0.000) (0.000) Observations 1,557 1,557 R-squared 0.037 0.103 Number of firms 154 154 Adj.R2 -0.076 0.093 F-test 4.869 8.934

Year fixed-effects Yes Yes

Industry fixed-effects Yes Yes

Robustness check No Yes

Fixed-effects regression of cash compensation as dependent variable. The sample generated from ExecuComp, Compustat, ISS, BEA, and the Global Reporting Initiative database. The panels excludes financial institutions (SIC codes 6000-6999). The period is 2006 through 2016. *,**,*** indicate statistical significance of the coefficients at 0.1, 0.05 and 0.01 confidence level, respectively (two-tailed). Standard errors clustered by firm. All variables are defined in appendix 1.

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Table 5 shows the regression results of CEO cash compensation, which is measured as the sum of salary, cash bonus and non-equity compensation (Brick et al., 2006). Based on the research of Ozkan (2011), the regression is divided into two different panel regressions. First, the independent variable is directly tested on the dependent variable. The second regression includes control variables and the robustness check within the model. Based on the last model, there is a positive and significant coefficient relation between GRI and cash compensation, which means a GRI G4 report has some influence over the cash compensation received by the CEO. The positive relation is based on the coefficient of 0.068 between GRI and cash compensation. This means that, on average, firms that have implemented a GRI G4 report have higher cash-based compensation than firms that have not implemented a G4 report. However, as stated in table 5, the relation is based on a 10% significance. Based on the research of Cuñat and Guadalupe (2009), the interpretation of the coefficient compared to the natural logarithm of cash compensation is as follows: a change from 0 to 1 in GRI equals an increase of 6.8 percent of cash compensation, if one controls for year and company effects. The same results are found when the fixed-effect regression of cash compensation includes firm fixed-effects. There is no difference between the two regression models, indicating collinearity between industry and firm fixed-effects due to the size of the sample. Compared to prior research of Erhemjamts et al. (2009) and Hermalin and Weisbach (2011) the increase of compensation is relatively small. Variables that have a significant influence on cash compensation are firm size, Tobin’s Q, and ROA value. The coefficients for year-, and industry dummies are not directly reported, as they are not relevant for this study (Ozkan, 2011). If a regression is executed only on the GRI variable, reporting in a G4 format is not significant in relation to cash compensation. However, an interesting finding by studying the results is that if there is no check for robustness, no significance is found on reporting in a G4 format and cash compensation. This is due to the fact that the sample consists of heteroscedasticity, and the robustness check controls for this phenomenon. Therefore, the regression model with a robustness check is the most appropriate one to use. This result is consistent with the expectation stated in hypothesis 1 and supports the principal-agent problem. In addition, the results are in line with the results of the research of Hermalin and Weisbach (2011) on cash compensation.

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Table 6: Equity compensation

Regression on equity compensation (equity_comp)

(1) (2)

Variable equity_comp equity_comp (C, R)

Report in G4 format 0.030 0.044 (0.535) (0.354) Ln(total assets) 0.313*** (0.000) Tobin’s Q 0.079*** (0.004) ROA value -0.123 (0.561) ROE value -0.011* (0.058) Leverage -0.317 (0.179)

Size of the board 0.005

(0.728) % independent directors 0.075 (0.605) ∆GDP -0.090*** (0.010) Constant 15.302*** 10.618*** (0.000) (0.000) Observations 1,557 1,557 R-squared 0.158 0.196 Number of firms 154 154 Adj.R2 0.059 0.186 F-test 23.820 10.970

Year fixed-effects Yes Yes

Industry fixed-effects Yes Yes

Robustness check No Yes

Fixed-effects regression of equity compensation as dependent variable. The sample generated from ExecuComp, Compustat, ISS, BEA, and the Global Reporting Initiative database. The panels exclude financial institutions (SIC codes 6000-6999). The period is 2006 through 2016. *,**,*** indicate statistical significance of the coefficients at 0.1, 0.05 and 0.01 confidence level, respectively (two-tailed). Standard errors clustered by firm. All variables are defined in appendix 1.

Table 6 shows the results for CEO equity compensation, which is measured by the sum of grants of restricted stock, and value of option grants. In contrast to cash compensation, a positive relation is not found between GRI and equity compensation, based on the same two regressions are executed on equity compensation.

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