In this paper, we explore how firms adjust CEO compensation incentives in response to corporate social responsibility (CSR) standing. Specifically, we focus on the effect of CSR standing on CEO’s risk-taking incentives.

We hypothesize that because firms possessing better social performance generate insurance-like moral capital that protects managers from market discipline, risk averse managers tend to take less risk than is optimal for shareholders. Firms should respond to this agency problem by offering greater risk-taking incentives to managers. Employing a large sample of the US firms from 1992 to 2010, we find strong empirical evidence to support our hypothesis.

Indeed, CSR standing is positively related to CEO pay-risk sensitivity (Vega), and this association is driven by CSR strengths rather than CSR concerns. Further, we provide evidence that firm overall risk and idiosyncratic risk negatively moderate the association between CSR and Vega.

By: CRAIG G. DUNBAR, Ivey Business School, Western University, ZHICHUAN FRANK LI, University of Western Ontario – Ivey School of Business, and YAQI SHI, University of Western Ontario – Richard Ivey School of Business

You can read the full SSRN article here