Executive compensation, corporate social responsibility, and corporate financial performance: a multi-equation framework

Abstract

Much has been discussed in various disciplines about the determinants of executive compensation. The importance of these scholarly inquiries has been underscored by the recent condemnation of high executive remuneration levels in the face of corporate failures and financial declines. Most researchers confine their analyses to single equation models that test various determinants and different measures of compensation. In this paper, we expand this approach to a multi-equation model that examines the determinants of executive compensation within a broader framework. Our specification explicitly allows for the endogeneity of executive compensation, firm financial performance, and corporate social responsibility (CSR). Chief among our findings is that this endogeneity assumption is supported, which means that financial performance and social performance are determined simultaneously. We further show that CSR is among the determinants of CEO pay, which indicates that pay-for-performance does not sufficiently explain compensation. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment.

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