peer reviewed article

CEO COMPENSATION AND CORPORATE SOCIAL PERFORMANCE:

A LONGITUDINAL EXAMINATION

by Roy L. Simerly, Minfang Li, and Kenneth E. Bass


Roy L. Simerly simerlyr@mail.ecu.edu and Kenneth E. Bass bassk@mail.ecu.edu are professors in the Department of Management, East Carolina University. Minfang Li mli@csun.edu is a professor in the Department of Management, California State University, Northridge.


INTRODUCTION

There are few management topics that produce as emotional a reaction as that of executive compensation. While there seems to be general agreement that pay-for-performance is a Ďgoodí idea, there is some public shock when the numbers are revealed. For example, Business Week recently reported that the median pay package for the top CEOs in 1996 was $2.3 million, a 39% gain over 1995. Other emotions were expressed when it was realized that the average worker had a pay gain of 3% for the same time period (Reingold, 1997). The business press (e.g., Business Week, Forbes, Fortune) contributes to the emotional element with stories that at one point praise companies for establishing pay-for-performance systems, then express outrage at what is perceived as the exorbitant compensations which result. This issue has become more important as the pressure on CEOs to increase stockholder wealth increases.

However, this trend has not been without its critics. Recently, the AFL-CIO (American Federation of Labor-Congress of Industrial Organizations) entered the debate and has begun to attack politically what they see as runaway compensation packages for CEOs which they perceive as coming at the expense of workers (Rose, 1998). Additionally, Robert Reich (1998), in a reaction to CEO compensation, stated that the interests of non-stockholder constituencies (i.e., other stakeholders) were being neglected, and called for government intervention in order to prevent corporations from avoiding their social responsibilities.

While former Secretary of Labor Reich might think it paradoxical, there are those who believe that a goal congruent compensation package should increase most areas of personal and social good. There are observations that by using compensation packages which focus managersí attention toward maximizing shareholder wealth, workers are enjoying greater job and retirement security than are citizens of other developed nations (Kay, 1998). There are also arguments that the linking of CEO compensation to the economic performance of the firm has contributed to improving the global competitiveness of U.S. firms, which, in turn, has improved the economic benefits for all (Fisher, 1998). From a broader perspective of social issues research, there have been indications that improved firm economic performance has been correlated with higher levels of corporate social performance (e.g., Waddock & Graves, 1997).

Despite the emotional rhetoric in the popular press during the 1990s, and political involvement during this same time period by some, including the former Secretary of Labor Robert B. Reich, the authors are unaware of any empirical research examining the relationship between CEO compensation and the social orientation of firms. Therefore, the purpose of this paper was to examine empirically the relationship between elements of CEO compensation and corporate social performance in an effort to determine whether CEO compensation had a positive or negative association with the social orientation of firms.

We define corporate social performance (CSP) as "a business organizationís configuration of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firmís societal relationships" (Wood, 1991: 693). Economic performance is defined by a relatively new term, Market Value Added. MVA is defined as the difference between the debt plus the equity investors have contributed to a company, and the market value of the firm. Therefore, MVA represents the net present value of the firm. These definitions are consistent with the premise that managerís responsibility is not to maximize shareholder wealth, but rather to maximize the net present value of the firm. This premise is based on the argument that managers are constrained in their actions by multiple stakeholders with divergent needs and demands (Donaldson & Lorsch, 1983). Those organizations best able to satisfy the demands of their stakeholders should enjoy the greatest economic benefit.

THEORY AND HYPOTHESES

The dominant rationale behind the creation of links between CEO compensation and firm economic performance was established by agency theory (Fama, 1980; Jensen, 1986; Jensen & Murphy, 1994). According to agency theory, the separation between owners and managers (Berle & Means, 1932) provided an opportunity for managers to act in their own self interest. The central issue for agency theory is how to resolve conflict between owners and managers over the control of corporate resources (Jensen, 1986, 1989). It is suggested that the use of contracts, which seek to allocate decision rights and incentives (Rumelt, Schendel & Teece, 1994), will better align the interests of owners and managers. The primary device suggested by agency theory to achieve this alignment was CEO compensation (i.e., salary, bonus and stock options). By linking CEO compensation to the economic performance of the firm, it was hoped that managers would focus more effort toward maximizing the wealth of all stockholders (Li & Simerly, 1998). According to Grossman & Hoskisson (1998), performance contingent compensation plans are becoming a norm among corporations. A concern is that these plans may be coming at the expense of both the long term survival of the organization, and of the needs of other stakeholder groups.

A defining characteristic of the last half of the twentieth century has been the fact that organizations have replaced the community and extended family as the nexus of everyday life (Stern & Barley, 1996). In one way or another, organizations have impacted both personal freedom and the ability of individuals to achieve self-fulfillment (Perrow, 1991). To counter these forces persons with common concerns have formed into "stakeholder" groups to both express their concerns, and attempt to influence organizations (Freeman, 1984; Shrivastava, 1995). Stakeholders were defined by Freeman as "any group or individual who can affect or is affected by the achievement of the firmís objectives" (1984:25). As a result, strategic managers are having to deal with an expanded base of stakeholders (Donaldson & Lorsch, 1983; Pfeffer & Salancik, 1978) as they make critical resource allocation decisions. This trend is likely to define the future as firms come to realize that their long-term success depends not on producing a given product or service, nor on maximizing shareholder wealth, but on satisfying needs within society.

A central idea from stakeholder theory is that managerial choice can be a function of the ability of stakeholders to influence decision making (Brenner & Cochran, 1991). This idea was expanded by Mitchell, Agle and Wood (1997) into a typology of stakeholder salience based on how managers prioritize stakeholder relationships. They argue that managers pay different degrees of attention to certain kinds of stakeholders based on the type of power, legitimacy, and urgency they possess. Rowley (1997) further noted that stakeholder relationships do not occur in a vacuum, but in a network in which different stakeholders are more likely to have direct relationship with one another. This study provides an opportunity for stakeholders to combine their impact by increasing their power, legitimacy, and urgency. His conclusion was that firms do not respond to stakeholders individually, but respond simultaneously to multiple stakeholders as they attempt to satisfy their corporate social obligations. Thus, while there seem to be many forces working to focus managerís attention toward maximizing shareholder wealth, there are also forces working to insure that managers do not forsake their responsibilities toward other stakeholder groups.

Strategic management scholars have long recognized that there are multiple stakeholders within the corporate domain, and that each stakeholder can have a profound effect on the fortunes of the corporation. Hamel and Prahalad (1994) point out that strategic managers today must answer to government agencies and special interest groups, as well as to customers and employees. Further, establishing long term relations with these groups can be a key to survival in an increasingly dynamic and competitive environment (DíAveni, 1994). More importantly, these stakeholders have divergent interests and different views as to what constitutes performance (Freeman, 1984). An empirical question is the extent to which these various stakeholder groups enter into the pay-for-performance equation; or more precisely, how does CEO compensation affect corporate social performance?

This is particularly relevant from the standpoint of goal setting theory (Pinder, 1984). From the goal setting literature, it has been demonstrated that specific goals can create tunnel vision (Locke & Latham, 1990). That is, by setting specific pay-performance criteria for managers, their attention is focused on a limited number of objectives, to the exclusion of others. From the standpoint of agency theory, if the specific goal of CEO compensation is to increase return on equity for the benefit of stockholders, this could focus managerís attention away from the requirements of other stakeholder groups. Zajac & Westphal (1997) demonstrated that companies do Ďget what they pay for.í That is, CEOs acted to increase those performance indicators that were assigned the greatest weights by their boards of directors.

While Zajac & Westphalís (1997) results could be taken as an indicator that firms are focusing more on economic performance to the exclusion of other objectives, recent studies of the relationship between firm economic performance and corporate social performance (e.g., Russo & Fouts, 1997; Waddock & Graves, 1997) provide support for an argument that firms are cognizant of their social responsibilities. Corporate social performance has been the topic of considerable research for about the last twenty-five years as businesses have increasingly been held responsible for their effects on stakeholders (Greening & Gray, 1994; Wood, 1991).

Motivated in part by concerned and active stakeholders who present firms with demands and constraints, organizational managers and researchers have accepted corporate social performance as an important goal for businesses to pursue. Many firms have begun to actively anticipate, and more readily respond to, social issues that may impact them (Preston & OíBannon, 1997; Wartick & Rude, 1986). As stated earlier, we define corporate social performance (CSP) as "a business organizationís configuration of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firmís societal relationships" (Wood, 1991: 693). Thus it is apparent that CSP is a multidimensional construct, involving managerial behaviors dealing with organizational inputs, internal behavior or processes, and outcomes (Waddock & Graves 1997).

While these studies have not identified the antecedents of this relationship, the results would provide support for an argument that firms are being actively involved in socially responsible actions. This should improve relationships with stakeholder groups, which, in turn, should produce better economic performance. Therefore, if firms are emphasizing economic results via CEO compensation, and firms are more cognizant of their social responsibilities, we can take the position that CEO total compensation should be positively related to corporate social performance. This research examines five related hypotheses derived from this position. For the readerís convenience, they are numbered consecutively. Each is listed and described below.

H1: CEO compensation will be positively related to corporate social performance.

The form that CEO compensation takes has been recognized as important to the governance of firms (Sanders & Carpenter, 1998; Zajac & Westphal, 1994). Therefore, we felt it necessary to disaggregate total compensation in an effort to determine the impact of each element on the social orientation of firms. The existence of statistically significant relationships among elements of compensation and social orientation would support an argument for the need to align elements of compensation with organizational objectives. This should assist in providing normative advice to practicing managers. The primary elements of compensation recognized in most studies are salary, bonus and stock options (e.g., Boyd, 1994; Conyon & Peck, 1998; Hambrick & Finkelstein, 1995).

CEO annual base salary has been considered an element of pay that focuses the CEOs attention on the short term performance of the firm (Jensen & Murphy, 1990). Additionally, there are arguments that salary is a signaling device that reflects the immediate status of the CEO rather than the actual performance of the individual (DeCrane Jr., et al. 1997). In other words, salary could be more a form of self-aggrandizement which contributes to a short term perspective. Further, some have suggested that CEOs may attempt to reduce their own risk by selecting base pay over other forms of compensation (Walsh & Seward, 1990). If CEOs are responding to pressure to maximize shareholder wealth in the short term, they would be more inclined to accept a large salary in lieu of longer term benefits, because the future of the firm could be in doubt. These studies lead to a concern that the short term orientation associated with an emphasis on salary could come at the expense of stakeholder groups other than stockholders. Therefore, we can hypothesize that:

H2: CEO salary will be negatively related to corporate social performance.

Annual bonus payments are closely tied to the economic performance of the firm as measured by accounting indicators of financial performance (Finkelstein & Hambrick, 1989), and provide a direct link between managerial actions and short term rewards (Rajagopalan, 1997). However, there are indications that stakeholders are assuming a more active role in making sure that corporations heed their causes (Stern & Barley, 1996). Their importance is not isolated as stakeholders are part of a network of relationships that can share their power, urgency and legitimacy among themselves (Rowley, 1997), thus forming coalitions to bring greater pressure to bear on the CEO.

Atkinson, Waterhouse & Wells (1997) suggest that the secondary processes necessary for the achievement of primary goals, such as profit, reflect the need to incorporate stakeholder management into the firm decision making process. An organization will establish relationships with various stakeholder groups to secure the resources necessary for ongoing operations, and to secure access to distribution systems to get their product or service to the ultimate consumer. Atkinson, et. al., (1997) identified these relationships as secondary processes which are essential to achieving primary objectives, such as profit maximization. From the perspective of the social issues literature, the establishment of relationships (positive or negative) among stakeholder groups evolves over a relatively long time horizon (Wood & Jones, 1995).

Since bonuses are usually paid in cash and are linked to past performance, they reflect rewards to CEOís for achieving both better economic performance and better integration of stakeholder demands. Therefore, we can hypothesize that:

H3: CEO bonus payments will be positively related to corporate social performance.

Stock options are a form of long term compensation likely to foster a longer decision horizon among managers. The intent of such compensation mechanisms is to insure the long term survival and profitability of the organization (Galbraith & Merrill, 1991). Also, for managers, the stock options compensation element has the advantage of removing penalties for short term negative fluctuations in performance measures over which the manager may have little control (Galbraith & Merrill, 1991). While it is true that the value of stock options will be the present value of the anticipated return-to-investors revenue stream, the reaction of the stock market to immediate events is apparent. This means that managers with stock options can wait until the market fairly values the stock before exercising the options. However, since this is a risk shifting strategy, we can hypothesize that:

H4: CEO stock options will have a negative impact on corporate social performance in the short run.

H5: CEO stock options will have a positive impact on corporate social performance in the long term.

METHODS

Data collection began with the firms listed in the Kinder, Lydenburg, Domini & Co.ís "The Corporate Social Ratings Monitor" for the period 1992 through 1996. We selected those firms listed for all five years. Data on CEO compensation were collected from Business Week and Forbes magazinesí annual surveys. Financial information was collected from COMPUSTAT and the Stern Steward Performance 1000 Report. Data were collected for three time periods: 1992, 1994 and 1996. Complete data were available for 203 firms across 53 industries. Owing to the nature of the question there was less concern for creating a homogeneous data set, and more for establishing the generalizability of the findings (McGrath, Martin & Kulka, 1982). Further, since the construct of corporate social performance is now well established in the literature, our concern for generalizability of the findings to a larger population group seemed appropriate.

Variables

Corporate social performance. Researchers have historically made hard choices in an effort to measure CSP (Wood & Jones, 1995). A number of researchers are turning to the Kinder, Lydenburg, Domini & Co., Inc. (KLD) database as an alternative which offers consistent measures across a relatively large (over 600) number of firms (Waddock & Graves, 1997). This company evaluates firms on eight elements generally accepted as attributes of CSP, and provides a five point rating scale ranging from Ė2 (major weakness) to +2 (major strength). As Sharfman (1993) points out, a significant strength of this rating system is that it reflects the multidimensional nature of the CSP construct, and because the data were gathered by independent evaluators it is less vulnerable to self-report bias. Of the eight measures provided by KLD, this study used five. These were community relations, employee relations, environmental consideration, product quality and liability, and women and minority issues. Other measures provided by KLD were excluded because of their limited applicability to the primary questions being addressed by this research. The measures excluded were investment in South Africa, involvement in nuclear power and association with military contracting.

Because the KLD data give equal weight to all attributes, this research employs a procedure developed by Ruf, Muralidhar & Paul (1998) to capture the differential importance of the specific dimensions incorporated in this study. These authors surveyed practicing managers and asked them to evaluate the relative importance of the CSP dimensions using an analytical hierarchy modeling and measuring process (AHP) (Saaty, 1980). The unique advantage of the AHP process is that it allows participants to structure complex, multi-criterion problems hierarchically and judge the relative importance of elements in each level of the hierarchy in comparison to an element of the next higher level. The judgments were then used as inputs to an algorithm to derive a vector of weights which indicated the relative priority to be attached to each entity in the hierarchy. Using this process Ruf, et al., (1998) developed the following weights for the five dimensions: .22 for product liability; .18 for employee relations; .15 for women/minorities; .14 for environment; and .12 for community relations. These weights were applied to our measures.

Economic performance. Measuring the economic performance of a firm has been a challenge for researchers (Venkatraman & Ramanujam, 1986). Most traditional measures of performance, such as return on investment or return on assets, are subject to manipulation by firms in order to project a desired image. According to Tushman & Romanelli (1985), performance is a consequence of achieving consistency and convergence among competing political and economic requirements. Consonant with their argument, Chakravarthy (1986) pointed out that performance is a multidimensional construct. Therefore most traditional measures will likely have limitations. In an effort to address some of these limitations, this study used a relatively new measure called Market Value Added (MVA).

MVA was developed by Stern Steward Management Services. MVA is defined as the difference between the debt and equity investors have contributed to a company and the total market value of the firm. In effect, it is the net present value of the firm. By using this measure we are striking a balance between the advantages and limitations of using firm-specific data and market-specific data. Of greater importance, this measure is theoretically more closely related to the specific objective of insuring returns which maximize the net present value of the firm, which, as noted before, is our assumption concerning the objectives of management. Since prior studies of CSP have already established a relationship between CSP and traditional measures of financial performance (Russo & Fouts, 1997; Waddock & Graves, 1997), this study extends prior research by introducing a relatively new measure of financial performance and establishing its relationship to corporate social performance.

Control variables. We incorporated two control variables in this study. The first was the capital structure, or debt-to-equity ratio. There is evidence that the debt-to-equity ratio may reflect a firmís relative risk and hence is an important aspect to be controlled. Specifically, the study by McGuire, Sundgren & Schneeweis (1988) supports an argument that risk is an important control variable when examining CSP. One reason for this is that firms which are highly leveraged would be under greater pressure from both lending institutions and institutional investors to insure adequate financial performance, and therefore could be less likely to expend resources on social activities.

The second control variable was firm size as measured by the number of employees. Larger firms may have more resources and hence the ability to pursue socially responsible activities. Further, they may have the requisite resources to pursue strategic changes important for improved performance, and the scale and scope to achieve economic efficiency. Smaller firms on the other hand may enjoy agility and entrepreneurial vitality. While the potential impact of size on CSP is unclear, it is apparent that we should control for size when explaining social performance.

As reported earlier, since our sample of firms was from a diverse range of industries it was originally thought necessary to control for possible industry effects (Griffin & Mahon, 1997; Henderson & Fredrickson, 1996; Waddock & Graves, 1997). However, in another set of ANOVA models (not reported here), we assessed the potential impact of industry. Specifically we integrated in the ANOVA model industry group as a fixed factor, and all the independent variables in the corresponding regression models as covariates (General Factorial Models in SPSS). The model estimates obtained were consistent with the regression models without the industry factor. The results indicated that the impact of industry did not alter the relationships between CEO pay and corporate performance (social or economic). We therefore reported here the regression models without the industry factor.

Analytical Methods

For the statistical analyses we employed multiple regression modeling with time lags for the independent variables. By introducing a two year time lag for the independent variables we were able to establish directionality for the causal hypotheses developed in this paper. In addition, by introducing two time periods, we were afforded the opportunity to observe how hypothesized relationships may evolve over the span of this study. Table 1 reports both descriptive statistics and correlation matrices related to the two periods of analyses.

TABLE 1.

Descriptive Statistics and Correlation Coefficients

Variable

Mean

s.d.

1

2

3

4

5

6

7

8

9

10

     

1. MVA96

9070.25

18608.26

 

.92

.27

.22

.14

.32

.32

.01

.03

.09

3811.73

8399.08

1. MVA94

2. MVA94

3926.65

8515.90

.89

 

.25

.21

.07

.22

.23

-.03

.03

.14

3901.54

9483.44

2. MVA92

3. CSP96

0.0088

0.04

.23

.21

 

.80

-.06

-.06

.06

-.09

-.06

.11

0.0020

0.047

3. CSP94

4. CSP94

0.0024

0.04

.26

.27

.76

 

-.11

-.05

-.04

-.12

-.01

.14

0.0014

0.043

4. CSP92

5. Pay94

2766.88

2542.87

.24

.20

.06

.02

 

.48

.57

.94

.06

.06

2116.31

2015.96

5. Pay92

6. Salary94

779.22

295.80

.29

.23

-.02

-.06

.52

 

.41

.29

..06

.37

739.21

267.06

6. Salary92

7. Bonus94

841.26

829.08

.19

.16

.11

.04

.57

.46

 

.29

..08

.11

604.14

552.10

7. Bonus92

8. Stock94

641.04

972.10

.08

.02

-.05

.01

.54

.39

.16

 

.03

-.02

772.97

1665.00

8. Stock92

9. CapStr94

75.56

189.63

-.01

-.09

.07

.02

.08

.17

.05

.10

 

.05

-367.40

6588.75

9. CapStr92

10. Size94

62.27

88.95

.12

.14

.08

.11

.12

.36

.19

.17

.16

 

61.84

86.73

10. Size92

     

1

2

3

4

5

6

7

8

9

10

Mean

s.d.

Variables

In the regression models, both market value added (MVA) for 1996 and 1994, and CSP for 1996 and 1994 were used as dependent variables. While CSP is the major dependent variable, we felt it appropriate to test empirically and present the results of CEO pay and economic performance along with CSP models. The literature has long debated the relationship between economic and social performance. As researchers put it, two questions are: can firms do well by doing good? and can firms do good by doing well (e.g., Fombrun & Shanley, 1990; Waddock & Graves, 1997). There has been some preliminary evidence that indeed firm economic performance may enhance firm social performance, and firm social performance may enhance firm economic performance. Hence we incorporated earlier economic and social performance indicators in the regression equations explaining firm social and economic performances respectively.

The central independent variable of interest in this study is, of course, CEO compensation level. We pursued two sets of regression analyses, the first set used total CEO compensation as the independent variable, the second set used the three key elements of CEO compensation as independent variables. These were CEO salary, CEO bonus and CEO stock options. In addition, we included capital structure and firm size as control variables.

RESULTS

Preliminary Assessments

In multiple regression modeling, it is important to have a reasonable data set size in order to avoid over-fitting data, and to assess possible presence of multicollinearity (Hair, Anderson, Tatham & Black, 1995). As reported earlier, the final data set contains 203 firms, with six independent variables, thus the data set was reasonably large (Hair et al., 1995) for regression analysis. We conducted an assessment of multicollinearity using the conventional procedures of coefficient variance decomposition analysis with condition indices (SPSS Win, 9.0), and found that the data set employed in this study did not present a multicollinearity problem.

Both dependent variables and independent variables were standardized using z transformation to reduce the possible confounding impact of size differences.

Total CEO Compensation

Table 2 presents the results of four regression equations with total CEO pay as the central independent variable. The F tests indicate that all four equations are significant. The following is a discussion of the results in light of the hypotheses developed earlier.

TABLE 2.

Regression Results: Performance and CEO Total Pay a, b

 

 

Regression Models

Independent Variables

MVA1996

 

MVA1994

 

CSP1996

 

CSP1994

(with two year lag)

b

t

 

b

t

 

b

t

 

b

t

Hypothesis-testing

                     

MVA

           

0.207

2.909**

 

0.249

3.590***

CSP

0.244

3.649***

 

0.222

3.174**

           

CEO Total Pay

0.231

3.447***

 

0.144

2.074*

 

0.010

0.153

 

-0.080

-1.159

                       

Control

                     

Capital Structure

-0.041

-0.607

 

0.023

0.339

 

0.062

0.880

 

-0.068

-0.985

Firm Size

0.069

1.006

 

0.033

0.471

 

0.040

0.556

 

0.083

1.187

(Constant)

 

-0.379

   

-0.262

   

-0.601

   

-0.806

                       

N

203

   

203

   

203

   

203

 

R2

0.126

   

0.067

   

0.052

   

0.081

 

Adjusted R2

0.109

   

0.049

   

0.033

   

0.062

 

F

7.149***

 

3.579**

 

2.729*

 

4.313**

a * p < 0.05; ** p < 0.01; *** p < 0.001; one-tailed tests for hypothesis testing, and two-tailed tests for control variables.

b Both dependent and hypothesis testing variables have been standardized.

For the two models with MVA as the dependent variable, a clear pattern emerges. Corporate social performance has a statistically significant positive impact. At the same time, total CEO pay has a statistically significant positive influence on firm economic performance.

For the two models with CSP as the dependent variable, again, corporate economic performance has a statistically significant positive impact on corporate social performance. These same models show that total CEO pay was not statistically significantly related to CSP. Hypothesis 1, that total compensation would be related to CSP, was not supported. However, the statistically insignificant impact of total CEO pay on corporate social performance appears to suggest the need for a better understanding of the impacts of individual elements of CEO pay. We now focus on the second set of regressions.

Elements of CEO Compensation

Table 3 presents the results of regression equations that incorporate three respective elements of CEO pay as our central independent variables. Again, all four regression equations are statistically significant (as the F statistics indicate).

TABLE 3.

Regression Results: Performance and Components of CEO Pay a, b

 

 

Regression Models

Independent Variables

MVA1996

 

MVA1994

 

CSP1996

 

CSP1994

(with two year lag)

b

t

 

b

t

 

b

t

 

b

t

Hypothesis-testing

                     

MVA

           

0.220

3.102**

 

0.252

3.516***

CSP

0.274

4.137***

 

0.238

3.683***

           

CEO Salary

0.314

3.776***

 

0.284

3.722***

 

-0.161

-1.833*+

 

-0.182

-2.190*

CEO Bonus

0.043

0.582

 

0.261

3.663***

 

0.137

1.771*+

 

0.086

1.102

CEO Stock Options

-0.042

-0.595

 

-0.122

-1.782*+

 

-0.038

-0.510

 

-0.047

-0.630

                       

Control

                     

Capital Structure

-0.062

-0.931

 

0.005

0.082

 

0.083

1.180

 

-0.070

-1.023

Firm Size

-0.016

-0.231

 

-0.083

-1.192

 

0.072

0.978

 

0.134

1.800+

(Constant)

 

0.429

   

0.507

   

-0.948

   

-1.220

                       

N

203

   

203

   

203

   

203

 

R2

0.163

   

0.217

   

0.079

   

0.102

 

Adjusted R2

0.138

   

0.193

   

0.051

   

0.074

 

F

6.373***

 

9.003***

 

2.805*

 

3.638**

a + p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001; one-tailed tests for hypothesis-testing and two-tailed tests for control variables.

b Both dependent and hypothesis testing variables have been standardized.

Consistent with the findings in Table 2, corporate social performance in the earlier period has a statistically significant positive impact on corporate economic performance, and corporate economic performance in the earlier period has a statistically significant positive impact on corporate social performance. More importantly, these models provide some preliminary evidence that different elements of CEO pay have different impact on firm performances. It is clear that CEO salary has a statistically significant positive impact on firm economic performance, and a statistically significant negative impact on corporate social performance. The latter finding supports Hypothesis 2, that CEO salary would be negatively related to corporate social performance.

The role of bonus seems to be limited. For one model of corporate economic performance (MVA 1994), bonus has a statistically significant positive impact. For the other model, the impact is not significant. For one model of corporate social performance (CSP 1996) bonus has a statistically significant positive impact, for the other one, the impact is not significant. While there appears to be some support to our theorizing that bonus may be an ad hoc positive incentive for social performance (Hypothesis 3), it is less clear why the impact has not been consistent through the two different time periods, and provides an incentive for future research.

Perhaps the most conceptually and empirically challenging results were from the analysis of CEO stock options. It appears that CEO stock options may have a negative impact on corporate economic performance but no statistically significant impact on corporate social performance. Our hypotheses 4 and 5 were not supported. That might be one limitation of the current study design as we have attempted to probe the dynamics of the relationships between CEO pay (both total and elements) on corporate social performance. We are unable to incorporate long term performance (in both areas) as our dependent variables. In the discussion section we will speculate on this finding.

For the control variables, firm size appears to have a positive impact on corporate social performance (CSP 1994). This might be the result of larger firms being able to be more socially active and responsive. This does support earlier studies by Fombrun & Shanley, 1990, and McGuire, et. al., (1988).

In summary, we found clear evidence that corporate social performance has a statistically significant positive impact on corporate economic performance, and corporate economic performance also has a statistically significant positive impact on corporate social performance in both time periods. When we analyzed CEO total pay it does have a positive impact on economic performance, but does not have an impact on corporate social performance. This finding highlights the importance of analyzing the elements of pay, rather than the total compensation package. It also agrees with the corporate governance literature which argues that the pay system is designed to achieve multiple objectives (Walsh & Seward, 1990). Our further analysis indicates that indeed CEO pay elements have differing impacts on corporate social and economic performance. While the picture is less clear when it comes to stock options, CEO salary influences social performance in a negative manner. At the same time CEO bonus appears to exert some positive influence on corporate social performance.

DISCUSSION

This study makes several contributions. First of all, it added further confirming evidence to the theorized linkage between economic and social performance. Secondly we advocated the differing impacts of various elements of CEO compensation on corporate social performance. Indeed, if different parts of CEO compensation are linked to different objectives it is clear that we should switch our attention from total pay to individual elements. This is quite clear in that our hypothesis regarding total compensation and corporate social performance (H1) was rejected while those regarding elements of CEO compensation received some support. The negative impact of salary and positive impact of bonus on corporate social performance have important implications. Specifically, those firms which emphasize CEO salary seem to be taking a short term orientation toward the overall performance of the firm and this could result in lowering the firmís attention toward its social responsibilities. Conversely, those firms which emphasize long term compensation are more likely to increase or maintain their orientation toward their social responsibilities.

The impact of CEO stock options on corporate social performance requires more elaboration. If CEO stock options are designed to link long term firm performance and CEO rewards, we need to define conceptually what constitutes "long term." In an unreported analysis, we found that CEO stock options had a negative impact on five-year average market value added. Would five years be a reasonable long term time span, or should we develop measures that would cover a greater number of years? Our study was unable to construct such a data set to test further due to data limitations. As a result we are unable to determine if CEO stock options are an effective means to link CEO compensation with a firmís long term performance. This is an area where future research would benefit both to the corporate governance literature and to the corporate social issues literature.

Clearly this study advanced our understanding of CEO pay and corporate social performance in some areas, and raised more questions in other areas. Our research design afforded us the ability to evaluate the impact of various explanatory variables on corporate social performance in two time periods. With the time lag introduced we were able to establish time precedence, a necessary condition for causal hypotheses. Furthermore, the multi-period design seems to offer some insights that can not otherwise be obtained from cross sectional research. We were able to identify some consistent patterns over time, and also some changing relationships. This points to another useful direction in future research, that is the inclusion of possible macro environment variables. For example, we may consider that as time goes by the impact of economic performance on social performance and vise versa will strengthen as more and more stakeholders are beginning to pay attention to corporate conduct in both economic and non-economic terms. As the mutual causal impact between the two performance areas increase, we may begin to see greater impact of CEO pay system on social performances.

As designed this study focused on corporate social performance as the criterion variable and theorized how CEO compensation and its elements might influence it. An equally important research direction would be to study if corporate social performance will have an impact on CEO compensation.


REFERENCES

Atkinson, A.A., Waterhouse, J.H., Wells, R.B. 1997. A stakeholder approach to strategic performance measurement. Sloan Management Review, 38(3): 25-37.

Berle, A. A., & Means, G. C. 1932. The modern corporation and private property. New York: Macmillan.

Boyd, B.K. 1994. Board control and CEO compensation, Strategic Management Journal, 15: 335-344.

Brenner, S.N., & Cochran, P.L. 1991. The stakeholder theory of the firm: Implications for business and society theory and research. In J.F. Mahon (Ed.), Proceedings of the Second Annual Meeting of the international Association for Business and Society: 449-467.

Chakravarthy, B. S. 1986. Measuring strategic performance, Strategic Management Journal, 7: 437-458.

Conyon, M.J., & Peck, S.I. 1998. Board control, remuneration committees, and top management compensation. Academy of Management Journal, 41: 146-157.

D'Aveni, R.A. 1994. Hypercompetition: Managing the dynamics of strategic maneuvering. New York: The Free Press.

Davis, J.H., Schoorman, F.D., & Donaldson, L. 1997. Toward a stewardship theory of management. Academy of Management Review, 22: 20-47.

DeCrane, Jr., A.C., Davis, M.L., Kozlowski, L.D., & Peck, C. 1997. The case for CEO incentive pay. Across the Board, 34(5): 45-48.

Donaldson, G. & Lorsch, J.W. 1983. Decision making at the top. New York: Basic Books.

Fama, E. F. 1980. Agency problem and the theory of the firm. Journal of Political Economy, 88: 288-307.

Finkelstein, S. & Hambrick, D. 1989. Chief executive compensation: A study of the intersection of markets and political processes. Strategic Management Journal, 10: 121-134.

Fisher, A. 1998. Readers on CEO Pay: Many are angry, a few really think the big guy is worth it. Fortune, 137(11): 296.

Fombrun, C. & Shanley, M. 1990. What's in a name? Reputation building and corporate strategy. Academy of Management Journal, 33: 233-258.

Freeman, R. E. 1984. Strategic management: A stakeholder approach. New York. Harper-Collins.

Galbraith, C.S., & Merrill, G.B. 1991. The effect of compensation program and structure on SBU competitive strategy: A study of technology intensive firms. Strategic Management Journal, 12: 353-370.

Greening, D., & Gray, B. 1994. Testing a model of organizational response to social and political issues. Academy of Management Journal, 37: 467-498.

Griffin, J. J., & Mahon, J.F. 1997. The corporate social performance and corporate financial performance debate: Twenty five years of incomparable research. Business and Society, 36: 5-31.

Grossman, W., & Hoskisson, R.E. 1998. CEO pay at the crossroads of Wall Street and Main: Toward the strategic design of executive compensation. The Academy of Management Executive, 12(1): 43-57.

Hair, J. F., Anderson, R.E., Tatham, R.L., & Black, W.C. 1995. Multivariate data analysis with readings (4th ed.). Englewood Cliffs, NJ: Prentice Hall.

Hambrick, D.C., & Finkelstein, S. 1995. The effects of ownership structure on conditions at the top: The case of CEO pay. Strategic Management Journal, 16: 175-193.

Hamel, G., & Prahalad, C.K. 1989. Strategic intent. Harvard Business Review, 67: 63-71.

Henderson, A. D., & Fredrickson, J.W. 1996. Information processing demands as a determinant of CEO compensation. Academy of Management Journal, 39: 575-606.

Jensen, M. C. 1986. Agency cost of free cash flow, corporate finance and takeovers. American Economic Review Papers and Proceedings, 76: 323-329.

Jensen, M. C. 1989. Eclipse of the public corporation. Harvard Business Review, 67: 61-74.

Jensen, M. C., & Murphy, K.J. 1990. Performance pay and top-management incentives. Journal of Political Economy, 98: 225-262

Jensen, M.C., & Murphy, K.J. 1994. CEO incentives - Its not how much you pay, but how. Harvard Business Review, 3: 138-153.

Kay, I.T. 1998. CEO pay and shareholder value. Compensation & Benefits Management, 14(3): 51-57.

Li, M. & Simerly, R.L. 1998. The moderating effect of environmental dynamism on the ownership and performance relationship. Strategic Management Journal, 19: 169-179.

Locke, E.A., & Latham, G.P. 1990. Goal setting and task performance. Englewood Cliffs, NJ: Prentice-Hall.

McGrath, J.E., Martin, J. & Kulka, R.A. 1982. Judgement Calls In Research. Beverly Hills, CA: Sage Publications.

McGuire, J. B., Sundgren, A., & Schneeweis, T. 1988. Corporate social responsibility and firm financial performance. Academy of Management Journal, 31: 854-872.

Mitchell, R.K., Agle, B.R., Wood, D.J. 1997. Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22: 853-886.

Perrow, C. 1972. Complex organizations: A critical essay. Glenview, IL: Scott, Foresman.

Pfeffer, J., & Salancik, G.R. 1978. The external control of organizations: A resource dependence perspective. New York: Harper & Row.

Pinder, C.C. 1984. Work motivation. London: Scott, Foresman & Company.

Preston, L.E., & O'Bannon, D.P. 1997. The corporate social-financial performance relationship. Business & Society, 36: 419-429.

Rajagopalan, N. 1997. Strategic orientations, incentive plan adoptions, and firm performance: Evidence from electric utility firms. Strategic Management Journal, 18: 761-785.

Reich, R.B. 1998. The new meaning of corporate social responsibility. California Management Review, 40(2): 8-17.

Reingold, J. 1997. Executive Pay. Tying pay to performance is a great idea. Business Week, April 21: 58-66.

Rose, R.L. 1998. Call to Action: Labor has discovered the perfect issue to galvanizing workers: CEO pay. Wall Street Journal, New York, April 9, R8.

Rowley, T.J. 1997. Moving beyond dyadic ties: A network theory of stakeholder influences. Academy of Management Review, 22: 887-910.

Ruf, B.M., Muralidhar, K. & Paul, K. 1993. The development of a systematic, aggregate measure of corporate social performance. Journal of Management, 24:119-133.

Rumelt, R. P., Schendel, D., & Teece, D.J. (Eds.). 1994. Fundamental issues in strategy: A research agenda. Boston, MA: Harvard Business School Press.

Russo, M.V., & Fouts, P.A. 1997. A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40: 534-559.

Saaty, T.L. 1980. The Analytic Hierarchy Process, New York, NY: McGraw Hill.

Sanders, Wm.G., & Carpenter, M.A. 1998. Internationalization and firm governance: The roles of CEO compensation, top team composition, and board structure. Academy of Management Journal, 41: 158-178.

Shrivastava, P. 1995. Ecocentric management for a risk society. Academy of Management Review, 20: 118-137.

Stern, R. N., & Barley, S.R. 1996. Organizations and social systems: Organization theory's neglected mandate. Administrative Science Quarterly, 41: 146-162.

Stimpert, J.L., & Duhaime, I.M. 1997. Seeing the big picture: The influence of industry, diversification, and business strategy on performance. Academy of Management Journal, 40: 560-583.

Tushman, M.L., & Romanelli, E. 1985. Organizational evolution: A metamorphosis model of convergence and reorganization. Research In Organizational Behavior, 7: 171-222. JAI Press, Greenwich, CN.

Venkatraman, N., & Ramanujam, V. 1986. Measurement of business performance in strategy research: A comparison of approaches, Academy of Management Review, 11: 801-814.

Waddock, S.A., & Graves, S.B. 1997. The corporate social performance - financial performance link, Strategic Management Journal, 18: 303-319.

Walsh, J. P., & Seward, J.K. 1990. On the efficiency of internal and external corporate control mechanisms. Academy of Management Review, 15: 421-458.

Wartick, S. L., & Rude, R. 1986. Issues management: Corporate fad or corporate function? California Management Review, 29: 124-140.

Wood, D. J. 1991. Corporate social performance revisited. Academy of Management Review, 16: 691-718.

Wood, D.J., & Jones, R.E.. 1995. Stakeholder mismatching: A theoretical problem in empirical research on corporate social performance. The International Journal of Organizational Analysis, 3: 229-267.

Zajac, E.J., & Westphal, J.D. 1994. The costs and benefits of managerial incentive and monitoring in large U.S. corporations: When is more not better? Strategic Management Journal, 15(Winter): 121-142.

Zajac, E.J., & Westphal, J.D. 1997. Do firms get what they pay for? How alternative performance criteria affect the CEO pay-for-performance relationship. Paper presented at the annual meeting of the Academy of Management, Boston.


mbar.jpg (9380 bytes)