Executive Compensation of SOEs and Corporate Social Responsibility: Theory and Evidence from China

Abstract

This paper proposes a Nash Bargaining model to show that there exits the inverted U-shaped relationship between state-owned enterprises (SOEs)’ corporate social responsibility (CSR) performance and the level of executive compensation received by SOE managers. Based on annual data for Chinese-listed SOEs over the period 2013-2018, this research also empirically explores the effect of executive compensation on CSR performance. Our empirical results show that the executive compensation of SOEs has an inverted U-shaped effect on CSR fulfillment, and that the inverted U-shaped effect is robust to endogeneity corrections. Subsample analysis suggests that marginal contributions of executive compensation on CSR performance are different in the secondary industry and service industry. The ERG hierarchy of needs and the upper echelon theory help explain the non-linear effects. Based on our both theoretical predictions and empirical results, this paper provides a new channel of unlocking the dynamics of CSR fulfillment.

Keywords: Corporate social responsibility; Executive compensation; State-owned enterprises; Inverted U-shaped effect; China

JEL Classification: G34, G38, O16