Paying for CSR is Good Governance

Is there a place for corporate social responsibility (CSR) in effective executive compensation? This author’s research says “yes.” Compensation for CSR both helps to serve shareholder interests and is a sign of good corporate governance. The author’s research on corporate governance and executive compensation for CSR examined whether incentives for CSR in executive compensation contracts were systematically related to more (or less) shareholder-friendly corporate governance. It found consistent evidence that firms with more shareholder-friendly corporate governance were more likely to observe executive compensation contracts with incentives linked to CSR outcomes. Identifying the types of social responsibility that are important for the firm’s bottom line is the first step in determining whether compensation for CSR might improve executive compensation incentives. If the right performance metrics are chosen, CSR can be an important part of a shareholder value-maximizing executive compensation plan for many firms, where social performance can impact financial performance. Corporate boards that weigh their responsibilities to society and their fiduciary duty to their shareholders can benefit from implementing CSR incentives effectively. Stakeholders who wish to see improved social performance, and shareholders who are concerned about financial return on investment, can both equally reach their goals.