The influence of investments in CSR and gender on CEO
compensation
Faculty of Economics and Business
Master’s Thesis Finance
Name: Vladimir Slot Student number: 2888939
Supervisor: Dr. Selmane Date: 11-01-2021
Abstract
This paper investigates the relationship between CSR investments, gender and CEO
compensation. Theory suggests that females would be more willing to invest in CSR even if that does not maximize their compensation. In this paper, panel data is used on the S&P500 in the years 2010-2018. Evidence is found on CSR investments having a positive effect on equity-based compensation and CSR investments having a negative effect on cash-based compensation. The main finding of this paper shows that female CEOs earn less than males and equity-based compensation is driven by CSR investments and thus, CEOs who act in the best interest of stakeholders would receive more of this compensation.
1. Introduction
Corporate social responsibility (CSR) has become increasingly popular in scientific research. Performing well on an economic level is not the only standard anymore. Nowadays, corporations are expected to perform according to the desire of all stakeholders, still maintain the highest standards and provide a certain minimum quality (Rao and Tilt, 2016). Organizations have more interest towards long-term environmental, economic and social consequences rather than only short-term shocks. Firms should improve on the promotion of transparency, ethics and fairness in all their activities. These standards involve quality in services and products, but also engaging in activities for charities. However, research confirms that CSR is not reported worldwide. A huge variation is present in the promotion of CSR among businesses from several countries (Chen and Bouvain, 2009). One of the reasons for this could be that CEOs or major influencers on firms lack the ability to make decisions according to CSR reporting standards (Bayoud and Kavanagh, 2012). This is because important decision-makers are held accountable for their choices with respect to stakeholders, which makes corporate governance even more crucial (Rao and Tilt, 2016). Because corporate social performance is not the ultimate purpose of most firms, CEO engagement in CSR can be questionable. Generally, two contradicting theories can explain CSR. Agency theory (Eisenhardt, 1989) suggests that CEOs would only be interested in their own interests rather than the maximization of value for the shareholders. CEOs personal benefits increase, as their reputation may become higher. This leads to more CEO compensation and more friction between the CEO and shareholders as firm value often decreases (Barnea and Rubin, 2010). Stakeholder theory argues that CEOs should act in the best interest of all stakeholders, in order to improve firm performance. When stakeholders feel that their relationship with a firm gets stronger, they are more willing to invest and that would lead to an increase in firm value (Deng et al., 2013).
types of compensation arise from agency problems. If CEO compensation is more equity-based, this would mean that there are more investments in CSR. When there is more cash-based compensation for CEOs, there will be less investments in CSR subsequently. This is because CEOs tend to keep cash-based compensation for themselves whereas equity-based compensation is more often reinvested in the company (Adams et al., 2005).
Recently, more females have become CEOs as gender equality is more important than ever. Even though the proportion of females leading firms is still small, it is increasing slowly (Bugeja et al., 2012). However, Elkinawy and Stater (2011) found that it is expected that males earn more than women in salary. This implies that there is still a gender pay gap present. In this paper, the relationship between CSR investments and CEO compensation is also examined with gender. This is to find results on whether female CEO compensation is lower and if they are more proactive to CSR than their male counterparts.
Previous studies have already focused on the relation between CEO compensation in general and CSR. Also, many studies have researched the relation between CSR and financial performance. However, this study differs from that in the sense that CEO compensation structure and CSR performance is investigated. Because CEO compensation is split up into cash-based and equity-based compensation, a better estimation on the relationship between CSR and CEO compensation can be made. The distinction in CEO compensation structure helps to address whether the results are in line with either stakeholder theory or agency theory. The gender pay gap is examined by looking at the gender variable in the tables. Also, an interaction variable of CSR and gender on CEO compensation is created to find results if gender and CSR are related. This leads to the following research question:
What is the influence of investments in corporate social responsibility and gender on CEO compensation structure?
2. Literature review
CSR
Whilst CSR has not one clear definition, in this paper CSR will be defined as “voluntarily taking actions that go beyond compliance with laws and regulations on environmental and social issues” (Rekker et al., 2014 p.86). CSR engagement could positively stimulate relationships with stakeholders, leading to more profit opportunities and better overall firm performance. Several theories are explained by Harjoto and Jo (2011) to find out why CSR is worthy to engage in and how firm performance is affected relative to other core business processes that affect firm performance. The first theory states that a reduction in conflict of interest will be present between stakeholders and the rationale behind this is that corporations use CSR to influence CEOs’ behaviour in alignment with shareholders and stakeholders. When CEOs behave in the best interest of stakeholders, agency problems will be decreased and Cai et al. (2011) confirm this. If employees perceive that executive compensation is too high in relation with their own compensation, they may become unmotivated and feel unhappy. This is the major reason for a negative relationship between employees and CEO compensation. Agency problems can be reduced by strengthening the relations with employees, as employee stocks are likely to increase when a CEO performs well. Cai et al. (2011) also discovered that if CEOs perform better in CSR terms, their compensation is likely to be lower than CEOs who perform worse. In this case, CEO compensation would be higher with a higher ESG score.
experience and age have a significant effect on CSR performance (Harjoto and Laksama, 2016). As governance characteristics covers board diversity, firm characteristics are also an important determinant of CSR. Multiple studies performed research on firm characteristics to find whether size, market-to-book ratio, research and development investments and return on investment influence CSR engagement. Research found evidence that there is a significant effect between size and CSR (Reverte, 2009; Artiach et al., 2010; Marano and Kostova, 2016). This implies that larger companies have to be more open towards CSR engagement as there is a larger community that critically judges firms’ behavior and companies want to be perceived as corporately social as possible (Dam and Scholtens, 2013). Between firms, size, profitability and research and development investments may have an impact on their CSR engagement, but multiple industries may have very different characteristics as well. Firms in polluting industries are generally more willing to engage in CSR than firms in less environmental industries (Reverte, 2009). As this approach is different from the governance view and the firm view, industries should be highlighted as well as they share many stakeholders. Moreover, firms in the same industry deal with governments that made rules for that industry (Dabic et al., 2016). This means that all these firms face similar restrictions, which could be on pollution and then strengthens competition within the industry (O’Connor and Shumate, 2010). Some characteristics in the industry support firms to be more willing to engage in CSR, such as having better contact with customers and using environmentally friendly sources (Rowley and Berman, 2000). Holder-Webb et al. (2008) analyzed 50 American companies and found that industry has an effect on disclosure on CSR. In their study, firms that were closer to the customer in the value chain disclosed more CSR based information than firms that are further away from the customer.
would lead to less friction between stakeholders. As stakeholders get the feeling that the company listens to them, they are more supportive and more willing to invest in the firm (Deng et al., 2013). This could also be in the form of a contract between stakeholders and the company. When CSR investments are high, CEOs have a reputation to keep up and stakeholders are more likely to put effort into the firm. This contract can be seen as an agreement between the firm and their stakeholders to have aligned interests and to be contributing to long-term sustainability. According to this theory, CEOs should listen to stakeholders, act in their best interests in order to increase firm value.
CEO compensation
The CEO is generally the main person that acts in the best interest of the firm for all stakeholders. Financially and socially, CEOs intend to do the most to help the firm survive and generate the most profits. This also helps the stakeholders, as investors gain return on their investments and employees get their salaries.
CEO compensation is split into two parts, the first being the cash-based compensation which includes all salary and bonuses that are paid out in cash. Secondly, equity-based compensation will be used and defined as the share of restricted stocks and the stock options CEOs get during the year. Both these shares are as a proportion of total CEO compensation. Karim et al. (2018) found that equity-based compensation for over 3000 publicly traded American companies is a larger share of total compensation than cash-based compensation in the period of 1998-2012. This study found that higher firm value is very closely related to more equity-based compensation than cash-equity-based compensation for CEOs.
Decisions made by CEOs often influence stock prices, as bad performance generally leads to a decrease. Many CEOs are compensated in the form of options, since then there is an incentive to act in the best interest of the firm for the long-term goals. In the short run, equity based compensation would not lead to agency problems as much as cash based compensation. Mehran (1995) found that equity based compensation would motivate CEOs to increase firm value rather than their compensation. It is also found that there is a positive relationship between equity based compensation and firm performance. This implies less agency problems over time, since stakeholders’ interests are aligned with managers’ incentives. This study did not focus on different types of equity based compensation, which is something that limits the research. Equity-based compensation motivates the CEO to perform better yearly and also increase value of employees’ stock options. The value of the stock options of employees will increase when there is more equity based compensation for the CEO relative to cash based compensation. When base salary is relatively low, lower cash compensation will be accepted by the CEO independent of CEOs performance (Rekker, 2014).
equity-based compensation which is dependent on long-term performance (Barnea et al, 2010). CEOs who earn more bonuses through cash-based compensation act in their own best interests at the cost of their stakeholders. Thus, the first hypothesis is as follows:
H1a: Cash-based CEO compensation is negatively influenced by investments in CSR
Equity-based CEO compensation would lead to incentives for the CEO in the long run. In this case, CEOs are motivated to help the firm in order to get their own best bonuses as well. Because now CSR becomes an activity that creates and enhances firm value, CEOs are more likely to perform in the best interests of stakeholders (Karim et al., 2018). Therefore, the following hypothesis can be formed:
H1b: Equity-based CEO compensation is positively influenced by investments in CSR
Gender influence
Globally, balancing gender in boards is encouraged and female CEOs are way more common than 20 years ago. When women directors are on top, they have some significant performance results. For example, women tend to be more responsive to corporate social responsibility and act more in best interests of all stakeholders rather than themselves (Kahreh et al., 2014). Moreover, having women on corporate boards often improves firm performance as women tend to have better attendance records than men. (Adams and Ferriera, 2009). According to Campbell et al. (2008), gender diversity has a positive influence on financial performance of the firm. Some other studies find that women are improving governance mechanisms and overall social performance of the company, which is positive as companies are concentrating on sustainability (Galbreath, 2011). A previous study by Harjoto et al. (2014) analyzed the relationship between diversity and CSR and found that gender diversity actually has a positive impact on CSR. More women in higher positions within a firm lead to more engagement in CSR, being more attentive towards stakeholders interests and show that there is less self-interest behavior (Kruger, 2009).
sympathy, amiable and considerate are more recognized in women (Dawar and Singh, 2016). Because of males being more self-interested, men tend to ask for more compensation than women in the same situation.
The relationship between CEO compensation and gender shows mixed results. Mugeja et al. (2012) provided evidence that if females reach it to the CEO level, their compensation will be equal to those of males. Moreover, the gender gap is decreasing over time and that implies that there will be less gender discrimination in compensation (Adams et al., 2007). For a small sample size, done by Jordan et al. (2007) on the Fortune 100 companies, there is no significant difference between male CEO and female CEO compensation. In 2000, compensation had been compared among CEOs using industry and firm size, which resulted in total CEO compensation being lower for females than for males (Mohan and Ruggiero, 2003). Elkinawy and Stater (2011) identified more general results, as they used many different executive positions and drew them into a pool. This study does not particularly focus on CEO compensation but on executive compensation in general. Their major finding is that there is approximately a 5% compensation gap between female and male total executive compensation. Bell (2005) used the S&P 500 firms to find relationships in pay differences for the top executives between 1992 and 2003. This study provides evidence that female CEOs reduce the compensation gap across the firm significantly. Still, in most studies, female CEOs receive less compensation than male CEOs. Therefore, the following hypothesis can be formed:
H2: Female CEOs receive less CEO compensation than their male counterparts.
H3: Female CEOs invest more in CSR than their male counterparts.
3. Methodology
The hypotheses are tested using multiple regressions. The research method is an ordinary least squared (OLS) regression to find this relationships between CEO compensation and CSR. CEO compensation is the dependent variable for fiscal year t and company i. The model is stated as follows:
i, = 0 + 1 ∗ , -1 + 2 ∗ G + 3 ∗ G ∗ CSR , -1+ ∑ ∗ i,t-1 + i,t
In which G stands for gender, CSR is measured through the ESG score and the control variables are a matrix of return on assets, market-to-book ratio, firm size, age, board independence, the existence of compensation committee and leverage.
Within CEO compensation, the distinction between cash-based compensation and equity-based compensation is made as well. Cash-equity-based compensation consists of salary and total bonuses (Rekker et al., 2014; Fernandes et al., 2012), whereas equity-based compensation consists of option and stock compensation. Also, total compensation is considered, which consists of cash-based compensation, equity-based compensation and other compensation. Other compensation is compensation that is not included in cash- or equity-based compensation, such as payment for unused vacation and payouts for cancelled stock options. In this paper, compensation is measured using the natural logarithm, in order to be able to account for all different companies. To find other results, the fractions of all different components are also determined and examined.
CSR investments are measured in the ESG score, which can be divided into three separate pillars that all provide a certain score. Environmental score, social score and governance score are the determinants of those three pillars. The other main variable to test for the hypothesis is gender. Gender is a dummy variable in which 0 equals a CEO being a male and 1 equals a CEO being a female.
larger firms can attract funding externally more easily. This would imply that they have a certain advantage over smaller firms (Labelle et al., 2015). As the S&P500 consists of both large and small firms, firm size is an appropriate control variable. Therefore, firm size is included in the control variables as it impacts CEO compensation indirectly. Next, return on assets (ROA) is calculated as the earnings before interest and tax divided by total assets (Cheng et al., 2009). This is the proxy to find out whether there are higher investments in CSR for more profitable firms. Market-to-book ratio and leverage are used as generally lower-risk firms tend to invest more in CSR than firms with higher risk (Orlitzky and Benjamin, 2001). Board independence is the amount of independent directors divided by the total board members. Board independence can influence CEO compensation as well. A dummy variable for the existence of compensation committee is included, as if such a committee is present, CEO compensation will not be excessively high (Daily et al., 1998). Age is included as a control variable as that may impact the level of CEO compensation. CEOs that are older may have more experience and thus have higher compensation. The lagged variables are used to overcome endogeneity problems. Also, most of CEO compensation is determined by the values of the year before.
results for hypothesis 3. When this interaction variable gives significant effects, this implies that female CEOs would invest more in CSR than males. This is because the dummy variable equals 1 when a CEO is female and ESG score is the best proxy for CSR investments.
4. Data and descriptive statistics
The sample consists of firms in the S&P500 in the years between 2010 and 2018. This data is retrieved from Execucomp, Compustat and Datastream. For the CSR investments, I look at the ESG score from Datastream. This is found in the CSR Asset4 database, which has data of more than 7000 companies all over the world. Since there is no data particularly on the CSR investments, ESG score is the best available proxy to explain CSR. This score is a measure of ESG score based on relative information. In a range from 0 to 100, companies are listed in terms of their performance and can be compared within industries or countries for example. As there are many different industries, it is important to be able to compare these companies. The ESG score is created in such a way that industries that tend to have higher pollution will not particularly have lower ESG scores than companies from another less polluting industry. A certain benchmark is used to have the most fair comparisons. For this paper, it implies that scoring high on ESG leads to higher CSR engagements. Because CSR investments are researched, ESG score is the best proxy and is used in this paper to explain CSR investments and ESG score is mostly based on differences in CSR investments. ESG score is measured through many different components broader than just CSR. However, because a lack of data on CSR investments in particular, ESG score is used to measure CSR investments. ESG score and CSR investments are thus not the same concepts, but ESG score is the best available measure for CSR investments and is therefore used in this study.
Descriptive statistics
Table 1 shows the descriptive statistics on all variables that are used in this paper. Each column represents its own observation values. In column 2, it is visible that mean annual total compensation equals 10.52 million US dollars. Equity-based compensation is the combination of options and stocks, which have a mean value of 1.639 and 4.804 million dollars respectively. This means that CEOs, on average, receive 1.639 million worth of option awards and 4.804 million dollars worth of stock awards. Cash-based compensation consists of salary and total bonuses, which have an average value of 1.09 million dollars and 2.517 million dollars. This implies that there is more equity-based compensation relative to cash-based compensation. This is also clear from the table when the fractions of total compensation are examined. The fractions say that on average 55,5% of compensation is awarded in equity and 39,9% is awarded in cash. For the CSR investment variable, ESG scores are the best proxy and are shown in the table as well as scores for each individual pillar. These values are in the range of 0-100 in which 0 is the lowest score and 100 is the best performance possible on the environmental, social and governance pillars. ESG score has a mean value of 49.65 and for the ESG pillars, environmental score has a mean value of 40.85, social score has an average value of 51.49 and governance score has an average value of 53.35. Because of many different industries, some companies have no disclosure on environmental scores. For gender, a small part of the CEOs are female because the mean value is 0.038. Because this is a dummy variable, in which female equals 1, a very low share of firms have a female CEO leading the company. Generally, in this sample, CEOs are approximately 57 years old with one firm having an extremely young CEO of 27 years old.
share of cash-based compensation relative to total compensation fluctuates a little but remains close to 40%.
Table 1:
VARIABLES N Mean Median SD Min Max
Salary ($000s) Bonus ($000s) 4,236 4,236 1,091 2,517 1,022 1,765 502.1 2,770 0 0 8100 32,975 All other compensation
($000s) 4,236 464.9 144.1 2,438 -758.7 64,849 Options ($000s) 4,236 1,639 0 3,650 0 90,693 Stocks ($000s) 4,236 4,804 3,800 5,562 0 131,980 Total compensation ($000s) 4,236 10,517 8,882 8,437 0 156,078 Cash-based share (%) 4,236 0.399 0.348 0.226 0 1 AOC share (%) 4,236 0.043 0.017 0.113 -0.129 1 Equity-based share (%) 4,236 0.557 0.616 0.238 0 1 Option-based share (%) 4,236 0.143 0 0.193 0 1 Stock-based share (%) 4,236 0.413 0.443 0.262 0 1 ESG score 4,236 49.85 51.54 20.67 2.01 93.22 Environmental score 4,236 41.02 42.99 29.17 0 98.53 Social score 4,236 51.68 52.61 22.51 6.11 97.77 Governance score 4,236 53.54 56.64 23.54 0.50 98.45 Age 4,236 57.05 57 6.237 27 86 Gender 4,236 0.038 0 0.190 0 1 Compensation committee 4,236 0.881 1 0.135 0 1 Board independence 4,236 0.727 0.833 0.286 0 1 Return on assets 4,236 0.179 0.163 0.190 -4.845 0.756 Firm size 4,236 8.946 8.880 1.260 3.90 13.15 Leverage 4,236 0.356 0.180 0.578 0 3.825 Market-to-book ratio 4,236 3.554 2.610 8.167 -42.24 48.46 The sample consists of 673 firms covered in the S&P500 between 2010-2018 in which 4236 observations are presented. The first seven variables, concerning compensation, are all in thousands of dollars. Below that, the percentages of each component are given relative to total compensation. Gender is a dummy variable in which 0 corresponds to a CEO being a male and 1 to a CEO being a female. Compensation committee is a dummy variable in which 0 implies a firm does not have a compensation committee and 1 implies that there is a compensation committee present. Board independence is the share of independent
Correlation matrix
Table 2 shows the correlation matrix of the Pearson r correlation for all variables. As
correlations in the total compensation part with other variables of compensation are high, one might suspect multicollinearity. This is logical, as total compensation is highly dependent of the five variables that are specified above total compensation in table 1. In this study, either total compensation, cash-based compensation or equity-based compensation will be used and therefore multicollinearity will not be a problem for this variable. Also, between the ESG score and its pillars, the correlations are quite high. Because Datastream makes its
calculations on these variables in a comparable way, this also is not a large problem. In this model, ESG score combined is used and not each pillar. Moreover, multicollinearity is almost surely present at a level of 0.90 or higher. That is not the case here, so there is no
multicollinearity present in the model.The mean variance inflation factor for all models is below 10, which is the benchmark for multicollinearity being present. For heteroscedasticity measures, robust standard errors are used. In the appendix, there is evidence on the fact that there were heteroscedasticity problems in the sample.
44,6% 42,3% 40,9% 38,2% 37,7% 37,8% 37,3% 43,1% 38,4% 4,3% 4,2% 4,2% 4,5% 4,1% 4,0% 4,7% 4,7% 3,9% 18,7% 18,8% 15,8% 15,4% 13,6% 12,3% 11,6% 11,7% 10,2% 32,4% 34,7% 39,0% 41,8% 44,6% 45,8% 46,4% 40,4% 47,4% 0 2000 4000 6000 8000 10000 12000 14000 2010 2011 2012 2013 2014 2015 2016 2017 2018
Figure 1: Decomposed compensation chart
Cash-based share AOC share Option-based share Stock-based share
Table 2: Pearson correlations
Variables Salary Bonus Stocks Option
s Cashcomp Equitycomp Totcomp ESGscore ENscore SOscore CGscore Gender Firm size Age Committee Boardindepend ence Salary 1.000 Bonus 0.227* 1.000 (0.000) Stocks 0.234* 0.112* 1.000 (0.000) (0.000) Options 0.101* 0.032 -0.001 1.000 (0.000) (0.025) (0.961) Cashcomp 0.598* 0.457* 0.190* 0.111* 1.000 (0.000) (0.000) (0.000) (0.000) Equitycomp 0.251* 0.111* 0.836* 0.548* 0.219* 1.000 (0.000) (0.000) (0.000) (0.000) (0.000) Totcomp 0.437* 0.255* 0.746* 0.482* 0.542* 0.889* 1.000 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) ESGscore 0.194* -0.003 0.147* 0.010 0.147* 0.128* 0.152* 1.000 (0.000) (0.838) (0.000) (0.508) (0.000) (0.000) (0.000) ENscore 0.230* 0.023 0.166* 0.034 0.154* 0.157* 0.182* 0.848* 1.000 (0.000) (0.112) (0.000) (0.017) (0.000) (0.000) (0.000) (0.000) SOscore 0.177* 0.012 0.152* 0.042* 0.162* 0.150* 0.178* 0.902* 0.741* 1.000 (0.000) (0.405) (0.000) (0.003) (0.000) (0.000) (0.000) (0.000) (0.000) CGscore 0.079* -0.035 0.055* 0.056* 0.036 0.016 0.016 0.743* 0.448* 0.479* 1.000 (0.000) (0.014) (0.000) (0.000) (0.012) (0.277) (0.278) (0.000) (0.000) (0.000) Gender 0.036 -0.017 0.045* -0.014 0.022 0.030 0.029 0.093* 0.076* 0.090* 0.062* 1.000 (0.012) (0.229) (0.002) (0.314) (0.127) (0.039) (0.045) (0.000) (0.000) (0.000) (0.000) Size 0.427* 0.090* 0.240* 0.118* 0.366* 0.266* 0.361* 0.459* 0.469* 0.405* 0.287* 0.081* 1.000 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) Age 0.204* 0.089* 0.010 0.030 0.167* 0.024 0.091* 0.019 0.034 0.013 -0.003 -0.002 0.083* 1.000 (0.000) (0.000) (0.500) (0.040) (0.000) (0.091) (0.000) (0.178) (0.017) (0.362) (0.849) (0.913) (0.000) Committee -0.011 0.021 0.023 -0.021 -0.032 0.007 -0.004 -0.033 -0.027 -0.036 -0.023 0.027 0.041* -0.031 1.000 (0.449) (0.147) (0.113) (0.140) (0.025) (0.607) (0.757) (0.021) (0.064) (0.012) (0.115) (0.059) (0.004) (0.032) Board independence -0.024 -0.035 0.003 -0.009 -0.025 -0.002 -0.010 -0.019 -0.024 -0.020 -0.001 0.003 -0.012 -0.004 0.003 1.000 (0.099) (0.014) (0.821) (0.534) (0.077) (0.879) (0.485) (0.188) (0.097) (0.172) (0.956) (0.862) (0.396) (0.795) (0.833)
17
5. Results
In table 3, the results of the OLS effects regression on CEO compensation are shown. Three different dependent variables are visible and regressions are ran on each variable. White standard errors are used, to prevent heteroscedasticity problems. The first three columns are the model without the interaction variable, to test for the hypothesis 1a, 1b and 2. The last three columns incorporated the interaction variable, which provides results on hypothesis 3. The first result that is discussed is on the first hypothesis, whether compensation and ESG score are related. As expected, there is a negative relationship between CSR investments, which is the proxy for ESG score, and cash-based compensation within a firm. In the first column of the table, there is statistical significance on this variable, which implies that there are lower CSR investments when there is higher cash-based compensation. The coefficient of -0.005 indicates that when ESG score goes up by proportion, there will be a decrease in cash-based compensation by 0.5%. The literature suggests that agency problems are present in the relationship between cash-based compensation and CSR investments. These results provide evidence for the fact that there are agency problems in this sample. CEOs tend to keep their cash-based compensation for themselves rather than that they would reinvest this into the firm. For size and return on assets, it is expected that larger firms and firms with higher ROA would yield more cash-based compensation for the CEO. An older CEO mostly receives more cash-based compensation than a younger CEO. This is in line with the fact that usually CEOs with more experience earn more compensation. Experience is different from age, but definitely related, because older CEOs typically have more experience. For this sample, there is statistical significance, which means that it can be said that age and cash-based compensation are related. A compensation committee also has a significant effect in cash-based compensation. Because this coefficient is negative, a committee decreases the amount of cash-based compensation received by the CEO.
18
increases, lower equity-based compensation is provided for the CEO. Overall, there is evidence for hypothesis 1b, such that there is a relation between CSR investments and equity-based compensation. Because of these results, CEOs are more likely to invest in CSR when they receive more equity-based compensation. This is in line with stakeholder theory, as the literature also proofs. Stakeholder theory states that more equity-based compensation would lead to CEOs acting in the best interest of stakeholders. As their compensation is provided in stocks and options, their main purpose is maximizing firm value and moreover, their own compensation. Therefore, these results are in line with what the literature also suggests. Hypothesis 2 focuses on females having less CEO compensation than males. Previous literature found mixed results on the amount of compensation females receive compared to their male counterparts. With this hypothesis, the purpose is to find out whether the gender gap still prevails or if females actually earn as much compensation as males. The results find that there is still quite a large gender gap. A female CEO receives less compensation than males in this sample. This holds for both cash-based compensation as well as equity-based compensation. Especially for equity-based compensation, there is a large difference between males and females. Still, a relatively small share of CEOs is actually female, so this should be taken into account.
19
the preferences of stakeholders than males, as there are no significant results for the fact that females invest more in CSR.
Table 3:
Regression results on the S&P500 sample of the years 2010-2018. Robust standard errors are represented in parentheses, ***,**,* represent significant effects at 1%, 5% and 10% level
20 Robustness checks
The first robustness check is on each pillar individually. Here, the objective is to find a result between each pillar and CEO compensation rather than all pillars combined. In the appendix, all three pillars’ results are visible. The same regression is run, such that the first three columns do not include the interaction variable. This means that the first three columns are to investigate hypothesis 1a,1b and 2, and column 4 through 6 investigate hypothesis 3.
In appendix C through E, the regression results of the environmental, governance and social score on different CEO compensation structure are shown. As a first robustness check, the ESG score is segregated into the three pillars, to see the impacts of each pillar individually. In appendix C through E, there is evidence on environmental score, governance score and social score having a relation with cash-based compensation. Hypothesis 1a on cash-based compensation can thus be supported from all pillars individually. For example, looking at the coefficient for cash-based compensation in appendix D, it can be said that when social score increases by one unit, cash-based compensation decreases by 0,5% for the CEO. In hypothesis 1b, equity-based compensation is examined and yields similar results as hypothesis 1a. Here, each pillar provides significant results on the hypothesis that equity-based compensation goes up when CSR investments are higher. The significant effects were expected as they are in line with stakeholder theory, such that cash-based compensation goes down and equity-based compensation goes up when environmental, social or governance score increases. For hypothesis 2, there are also significant results. This implies that females receive less compensation than males, also when there is a different independent variable included in the model. This implies that there is still a pay gap between males and females. The last hypothesis on females investing more in CSR than males cannot be supported from any of the regressions on the pillars as all coefficients are insignificant.
21
22
Table 4:
Regression results on the S&P500 sample of the years 2010-2018. CBS stands for cash-based share, OBS stands for option-based share and SBS stands for stock-based share. All relative to
total compensation. Standard errors are represented in parentheses, ***,**,* represent significant effects at 1%, 5% and 10% level respectively.
VARIABLES CBS OBS SBS CBS OBS SBS
23
5. Conclusion
Using stakeholder theory and agency theory, this paper aims to find relationships between the level of CEO compensation and CSR investments. In this paper, the hypotheses are based on the fact that certain forms of CEO compensation are related to CSR investments. The first hypothesis aims to find a relation between cash-based compensation and CSR investments. Hypothesis 1b is on the relation between equity-based compensation and CSR investments. Hypothesis 2 is on female CEO compensation relative to their male counterparts. The last hypothesis covers the question whether females invest more in CSR than males.
There is evidence found on the fact that equity-based compensation is influenced by CSR investments, which is in line with stakeholder theory. Thus, a CEO acting in the best interest of all stakeholders would receive more equity-based compensation and that would lead to better firm performance, as stakeholders have faith in the CEO. CSR has become one of the most important issues on the company’s agenda, to help the environment for example. This study differentiates from studies before in the sense that an interaction between ESG scores and gender is used and different CEO compensation components are specified individually. OLS regressions are used and gave significant results on equity-based compensation and in the robustness checks, it became clear that more CSR investments yield more stocks for CEOs. This result is in line with the paper of Mehran (1995), who provided evidence on the positive relation between equity-based compensation and CSR. For cash-based compensation, it was expected that it is negatively influenced by CSR investments. In this sample, evidence is found between the negative relation of CSR investments on cash-based compensation. Agency theory supports the results on this negative relation.
Another main aim of the study was to find whether there is a gender pay gap or not. This study found significant results that females still receive less compensation than males.
24
In this study, S&P500 data is used, which is not representative for all other countries. Another study could look at effects in smaller countries or industries that are different. For the level of CSR investments, ESG score is used as a proxy here. In other countries, the transparency of disclosing information may be lower and also in this sample, it is not compulsory to provide information on ESG performance. In the S&P500, disclosure on this information was
relatively high, as almost all firms disclosed information. In this study, CEO compensation is examined. It could also be interesting to find results for compensation of a chief financial officer, or other members of management teams of firms. Moreover, other control variables could be added, to find more relationships, such as tenure, CEO duality or board diversity. The final limitation pertains to the fact that social and environmental scores, which are
included in the ESG score, are not regulated. This means that firms can freely choose whether they want to report data on CSR. Hawley (2017) found that investigations on CSR are done insufficiently, which may lead to firms pretending to be better than they actually behave. Regarding the issues on stakeholder theory and agency theory, CEO compensation is based on more components than just financial performance. Since stakeholders become more
important, with capital for example, CEOs have to do their best in order to retain their compensation level and potentially increase that level. When CEOs do not have full
commitment, stakeholders have less faith, which results in lower compensation for CEOs. As CSR becomes increasingly important, performance on CSR is linked to CEO compensation. Because the data on CSR performance may be biased now, clear regulations on reporting CSR may be the solution. This prevents CEOs from abusing the disclosure in order to have their own highest benefits. For example, when governments oblige that firms disclose certain information, CSR will be more reliable.
25
References
Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of financial economics, 94(2), 291-309.
Adams, R., Almeida, H., Ferreira, D., 2005. Powerful CEOs and their impact on corporate performance. Review of Financial Studies 18, 1403–1432.
Adams, S. M., Gupta, A., Haughton, D. M., & Leeth, J. D. (2007). Gender differences in CEO compensation: Evidence from the USA. Women in Management Review.
Artiach, T., Lee, D., Nelson, D., & Walker, J. (2010). The determinants of corporate sustainability performance. Accounting & Finance, 50(1), 31-51.
Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of business ethics, 97(1), 71-86.
Bayoud, N. S., & Kavanagh, M. (2012). Corporate Social responsibility disclosure: evidence from Libyan managers. Global Journal of Business Research, 6(5), 73-83.
Bell, L., 2005. Women-led firms and the gender gap in top executive jobs. Institute for the Study of Labor Working Paper No. 1689 (Germany)
Berrone, P., & Gomez-Mejia, L. R. (2009). Environmental performance and executive compensation: An integrated agency-institutional perspective. Academy of Management
Journal, 52(1), 103-126.
Boorstin, J., 2020. The number of female CEOs is increasing—but here are the big problems standing in their way. Retrieved from https://www.cnbc.com/2020/01/24/number-of-female-ceos-is-increasing-but-they-still-face-glass-cliffs.html
Bugeja, M., Matolcsy, Z. P., & Spiropoulos, H. (2012). Is there a gender gap in CEO compensation?. Journal of Corporate Finance, 18(4), 849-859.
Cai, Y., Jo, H., & Pan, C. (2011). Vice or virtue? The impact of corporate social responsibility on executive compensation. Journal of Business Ethics, 104(2), 159-173.
Campbell, K., & Mínguez-Vera, A. (2008). Gender diversity in the boardroom and firm financial performance. Journal of business ethics, 83(3), 435-451.
Chen, S., & Bouvain, P. (2009). Is corporate responsibility converging? A comparison of corporate responsibility reporting in the USA, UK, Australia, and Germany. Journal of
Business Ethics, 87(1), 299-317.
Cheng, S. (2008). Board size and the variability of corporate performance. Journal of Financial Economics, 87(1), 157-176.
Cook, A., & Glass, C. (2014). Above the glass ceiling: When are women and racial/ethnic minorities promoted to CEO?. Strategic Management Journal, 35(7), 1080-1089.
Coombs, J. E., & Gilley, K. M. (2005). Stakeholder management as a predictor of CEO compensation: Main effects and interactions with financial performance. Strategic
26
Dabic, M., Colovic, A., Lamotte, O., Painter-Morland, M., & Brozovic, S. (2016). Industry-specific CSR: Analysis of 20 years of research. European Business Review.
Daily, C. M., Johnson, J. L., Ellstrand, A. E., & Dalton, D. R. (1998). Compensation committee composition as a determinant of CEO compensation. Academy of Management
Journal, 41(2), 209-220.
Dam, L., & Scholtens, B. (2013). Ownership concentration and CSR policy of European multinational enterprises. Journal of Business Ethics, 118(1), 117-126
Dawar, G., & Singh, S. (2016). Corporate social responsibility and gender diversity: A literature review. Journal of IMS Group, 13(1), 61-71.
Deng, X., Kang, J. K., & Low, B. S. (2013). Corporate social responsibility and stakeholder value maximization: Evidence from mergers. Journal of financial Economics, 110(1), 87-109. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of
management review, 14(1), 57-74.
Elkinawy, S., Stater, M., 2011. Gender differences in executive compensation: Variation with board gender composition and time. Journal of Economics and Business 63, 23-45.
Fernandes, N., Ferreira, M. A., Matos, P., & Murphy, K. J. (2013). Are US CEOs paid more? New international evidence. The Review of Financial Studies, 26(2), 323-367.
Freeman, R. E. (1994). The politics of stakeholder theory: Some future directions. Business
ethics quarterly, 409-421.
Galbreath, J. (2011). Are there gender-related influences on corporate sustainability? A study of women on boards of directors. Journal of Management & Organization, 17(01), 17-38. Gamerschlag, R., Möller, K., & Verbeeten, F. (2011). Determinants of voluntary CSR disclosure: empirical evidence from Germany. Review of Managerial Science, 5(2-3), 233-262.
Hafsi, T., & Turgut, G. (2013). Boardroom diversity and its effect on social performance: Conceptualization and empirical evidence. Journal of Business Ethics, 112(3), 463-479 Harjoto, M., & Laksmana, I. (2016). The Impact of Corporate Social Responsibility on Risk Taking and Firm Value. Journal of Business Ethics, 1-21.
Holder-Webb, L., Cohen, J.R., Nath, L. and Wood, D. (2008), “The supply of Corporate Social Responsibility disclosures among U.S. firms”, Journal of Business Ethics, Vol. 84, No. 4, pp. 497-527.
Jordan, C., Clark, S., Waldron, M., 2007. Gender bias and compensation in the executive suite of the Fortune 100. J. Organ. Cult. Commun. Conflict 11, 19–29
Kahreh, M. S., Babania, A., Tive, M., & Mirmehdi, S. M. (2014). An examination to effects of Gender Differences on the Corporate Social Responsibility (CSR). Procedia-Social and Behavioral Sciences, 109, 664-668.
27
Krüger, P. (2009). Corporate social responsibility and the board of directors.Job Market Paper. Toulouse School of Economics, France.
Labelle, R., Francoeur, C., and Lakhal, F. (2015). To regulate or not to regulate? Early evidence on the means used around the world to promote gender diversity in the boardroom. Gender, Work and Organization, 22(4), 339-363.
Lee, S. P., & Chen, H. J. (2011). Corporate governance and firm value as determinants of CEO compensation in Taiwan. Management research review.
Manner, M. H. (2010). The impact of CEO characteristics on corporate social performance.
Journal of business ethics, 93(1), 53-72.
Marano, V., & Kostova, T. (2016). Unpacking the institutional complexity in adoption of CSR practices in multinational enterprises. Journal of Management Studies, 53(1), 28-54. Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2007). Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance. Ann Arbor, 1001, 48109-1234.
Martínez‐Ferrero, J., Garcia‐Sanchez, I. M., & Cuadrado‐Ballesteros, B. (2015). Effect of financial reporting quality on sustainability information disclosure. Corporate Social
Responsibility and Environmental Management, 22(1), 45-64.
Mehran, H. (1995). Executive compensation structure, ownership, and firm performance. Journal of financial economics, 38(2), 163-184.
Mohan, N., Ruggiero, J., 2003. Compensation differences between male and female CEOs for publicly traded firms: a nonparametric analysis. J. Oper. Res. Soc. 54, 1242–1248.
O’Connor, A. and Shumate, M. (2010), “An economic industry and institutional level of analysis of Corporate Social Responsibility communication”, Management Communication Quarterly, Vol. 24, No. 4, pp. 529-551
Orlitzky, M., & Benjamin, J. D. (2001). Corporate social performance and firm risk: A meta-analytic review. Business & Society, 40(4), 369-396.
Pontefract, D., 2016. Faking Corporate Social Responsibility Does Not Fool Employees Retrieved from https://www.forbes.com/sites/danpontefract/2016/09/24/faking-corporate-social-responsibility-does-not-fool-employees/#715057179946
Ramaswamy, K., Veliyath, R., & Gomes, L. (2000). A study of the determinants of CEO compensation in India. MIR: Management International Review, 167-191.
Rao, K., & Tilt, C. (2016). Board composition and corporate social responsibility: The role of diversity, gender, strategy and decision making. Journal of Business Ethics, 138(2), 327-347. Rekker, S. A., Benson, K. L., & Faff, R. W. (2014). Corporate social responsibility and CEO compensation revisited: Do disaggregation, market stress, gender matter?. Journal of
Economics and Business, 72, 84-103.
Reuters, T. (2020). Thomson Reuters Database on ESG scores. Retrieved from
28
Reverte, C. (2009). Determinants of corporate social responsibility disclosure ratings by Spanish listed firms. Journal of Business Ethics, 88(2), 351-366
Rowley, T. and Berman, S. (2000), “A brand new brand of corporate social performance”, Business & Society, Vol. 39, No. 4, pp. 397-418.
Russo, M.V., Harrison, N.S., 2005. Organizational design and environmental performance clues from the electronics industry. Acad. Manag. J. 48, 582–593.
Tajfel H, Turner JC. 1985. The social identity theory of group behavior. In Psychology of Intergroup Relations, Tajfel H (ed). Cambridge University Press: Cambridge, UK; 15–40.
Appendix
Appendix A. Descriptions for all variables used in the regressions
Variables Description
Age Age of the CEO
All other compensation Compensation that is not specified in the other variables, such as signing bonuses and 401K contributions
Board independence The share of independent directors relative to total board members in a firm
Bonus Bonus awards for the CEO during the fiscal year
Cash-based share Percentage of total compensation that is awarded in cash to the CEO in the fiscal year
Compensation committee A committee that sets the level of compensation and decides payment rate for CEOs
Environmental score A score that measures the impact of firms on resources, emissions and the environment as a whole
Equity-based share Percentage of total compensation that is awarded in equities to the CEO in the fiscal year
ESG score A company score based on disclosed information and consists of the environmental, social and governance pillars
Firm size The natural logarithm of net sales
29
Governance score A score that measures the impact of firms on CSR strategy, management and acting in the best interest of shareholders
Leverage Debt divided by equity
Market-to-book ratio Ratio that evaluates the company’s current market value relative to its book value
Non-equity incentive plan comp Cash compensation paid to the CEO, based on disclosed financial information that is related to the company Option awards Fair value of awarded options for a CEO during the fiscal
year
Option-based share Percentage of total compensation that is awarded in options to the CEO in the fiscal year
Return on assets Earnings before interest and tax divided by total assets Salary Base salary for a CEO during the fiscal year
Social score A score that measures the impact of firms on the community, human rights, product responsibility and workforce
Stock awards Fair value of awarded stocks for a CEO during the fiscal year
Stock-based share Percentage of total compensation that is awarded in stocks to the CEO in the fiscal year
30
Appendix C. Environmental score regression
VARIABLES Cash compensation Equity compensation Total compensation Cash compensation Equity compensation Total compensation Environmental score -0.001** 0.009*** 0.003*** -0.001** 0.009*** 0.003*** (0.001) (0.002) (0.000) (0.001) (0.002) (0.000) Gender -0.179*** -0.136* -0.144*** -0.175*** -0.144* -0.151*** (0.050) (0.072) (0.045) (0.053) (0.075) (0.041) Size 0.194*** 0.213*** 0.201*** 0.194*** 0.214*** 0.201*** (0.017) (0.039) (0.013) (0.017) (0.039) (0.013) ROA 0.049 -1.368*** -0.349*** 0.049 -1.373*** -0.349*** (0.172) (0.421) (0.127) (0.172) (0.422) (0.127) Leverage 0.006*** 0.005 0.001 0.006*** 0.005 0.001 (0.002) (0.007) (0.002) (0.002) (0.007) (0.002) MTB-ratio -0.000 0.000 -0.000 -0.000 0.000 -0.000 (0.000) (0.001) (0.000) (0.000) (0.001) (0.000) Age 0.019*** -0.015* 0.007* 0.019*** -0.015* 0.007* (0.005) (0.008) (0.004) (0.005) (0.008) (0.004) Committee -0.179*** 0.263 -0.060 -0.179*** 0.265 -0.060 (0.055) (0.342) (0.062) (0.055) (0.343) (0.062) Board independence -0.031 0.099 -0.005 -0.031 0.098 -0.005 (0.057) (0.139) (0.047) (0.057) (0.139) (0.047) Gender x ESG score 0.000 -0.013 -0.000 (0.003) (0.008) (0.003) Constant 5.169*** 6.245*** 6.786*** 5.169*** 6.222*** 6.786*** (0.310) (0.646) (0.213) (0.311) (0.645) (0.214) Observations 4,236 4,236 4,236 4,236 4,236 4,236 Adjusted R-squared 0.067 0.033 0.112 0.067 0.033 0.112
31
Appendix D. Social score regression
VARIABLES Cash compensation Equity compensation Total compensation Cash compensation Equity compensation Total compensation Social score -0.005*** 0.013*** 0.006*** -0.005*** 0.013*** 0.006*** (0.001) (0.002) (0.001) (0.001) (0.002) (0.001) Gender -0.146*** -0.193* -0.116*** -0.148*** -0.191* -0.118*** (0.051) (0.092) (0.045) (0.052) (0.095) (0.046) Size 0.168*** 0.216*** 0.190*** 0.169*** 0.217*** 0.190*** (0.018) (0.039) (0.015) (0.018) (0.039) (0.015) ROA 0.006 -1.483*** -0.402*** 0.004 -1.493*** -0.404*** (0.169) (0.428) (0.129) (0.170) (0.429) (0.129) Leverage 0.008*** 0.005 0.002 0.008*** 0.005 0.002 (0.003) (0.007) (0.003) (0.003) (0.007) (0.003) MTB-ratio -0.000 0.000 -0.000 -0.000 0.000 -0.000 (0.000) (0.001) (0.000) (0.000) (0.001) (0.000) Age 0.020*** -0.014* 0.007** 0.020*** -0.014* 0.007** (0.005) (0.008) (0.004) (0.005) (0.008) (0.004) Committee -0.162*** 0.307 -0.040 -0.162*** 0.310 -0.040 (0.057) (0.342) (0.063) (0.057) (0.342) (0.063) Board independence -0.030 0.093 -0.007 -0.030 0.091 -0.007 (0.057) (0.138) (0.047) (0.057) (0.138) (0.047) Gender x ESG score -0.002 -0.015 -0.002 (0.003) (0.011) (0.003) Constant 5.148*** 5.847*** 6.666*** 5.142*** 5.808*** 6.661*** (0.309) (0.640) (0.210) (0.310) (0.640) (0.211) Observations 4,236 4,236 4,236 4,236 4,236 4,236 Adjusted R-squared 0.074 0.035 0.121 0.074 0.035 0.121
32
Appendix E. Governance score regression
VARIABLES Cash compensation Equity compensation Total compensation Cash compensation Equity compensation Total compensation Governance score -0.003*** 0.009*** 0.002** -0.003*** 0.009*** 0.001** (0.001) (0.002) (0.001) (0.001) (0.002) (0.001) Gender -0.175*** -0.147** -0.155*** -0.178*** -0.162** -0.157*** (0.050) (0.065) (0.044) (0.054) (0.070) (0.043) Size 0.194*** 0.258*** 0.227*** 0.194*** 0.260*** 0.227*** (0.017) (0.035) (0.014) (0.017) (0.036) (0.014) ROA 0.080 -1.264*** -0.335*** 0.080 -1.267*** -0.335*** (0.175) (0.409) (0.125) (0.175) (0.409) (0.125) Leverage 0.006** -0.000 -0.000 0.006** -0.001 -0.000 (0.003) (0.005) (0.002) (0.003) (0.005) (0.002) MTB-ratio -0.000 0.000 -0.000 -0.000 0.000 -0.000 (0.000) (0.001) (0.000) (0.000) (0.001) (0.000) Age 0.020*** -0.014* 0.007** 0.020*** -0.014* 0.007** (0.005) (0.008) (0.004) (0.005) (0.008) (0.004) Committee -0.175*** 0.280 -0.056 -0.175*** 0.282 -0.057 (0.054) (0.342) (0.060) (0.054) (0.342) (0.060) Board independence -0.034 0.081 -0.010 -0.034 0.079 -0.010 (0.057) (0.139) (0.047) (0.057) (0.139) (0.047) Gender x ESG score -0.000 -0.011 0.001 (0.003) (0.009) (0.003) Constant 5.068*** 5.634*** 6.585*** 5.068*** 5.601*** 6.588*** (0.311) (0.640) (0.213) (0.313) (0.641) (0.214) Observations 4,236 4,236 4,236 4,236 4,236 4,236 Adjusted R-squared 0.069 0.031 0.098 0.068 0.031 0.098
