Journal of Applied Finance & Banking

Corporate Social Responsibility and Financial Performance: Does CEO Compensation Really Matter?

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  • Abstract

    With the increasing emphasis on environmental protection in the global economy, CEOs are under immense pressure from their stakeholders to improve corporate social responsibility (CSR). However, prior studies have contradictory conclusions about the relationship between CSR and financial performance (FP). We thus extend prior research by investigating whether CEO compensation moderates the CSR-FP link. This study uses US firm data from the KLD database for the period 2003-2011. The results of the empirical analysis indicate that CEO compensation with a long-run focus can positively moderate the link between the people aspect of CSR and long-run FP. This is thus consistent with signaling theory, which states that CEO compensation with a long-run focus increases the incentive to hire women and minorities, and enhances the good treatment of employees. As a result, firms engaging more in the people aspect of CSR activities tend to have greater overall long-run profitability.