Aligning Incentives for Social Responsibility: Evidence from Performance-Contingent Equity Awards

74 Pages Posted: 28 Jan 2025

See all articles by Xudong Fu

Xudong Fu

University of Louisville

Tian Tang

University of Louisville

Multiple version iconThere are 2 versions of this paper

Abstract

This paper examines the relationship between CEO performance-contingent (p-c) incentive contracts and Corporate Social Responsibility (CSR), focusing on the alignment of CSR investments with shareholder value maximization. Drawing on contrasting perspectives—instrumental and agency cost—we investigate whether p-c equity awards incentivize managers to engage in CSR activities that enhance firm performance and value. Leveraging firm-level fixed effects, an exogenous event surrounding FAS 123-R adoption, and instrumental variable approaches, we find robust evidence linking p-c equity awards to heightened CSR engagement. Furthermore, we find that p-c equity awards effectively incentivize CEOs to engage in value-enhancing CSR activities. Ancillary tests reveal magnified effects in firms requiring greater stakeholder support, enjoying stronger corporate governance, and experiencing lower information asymmetry. Further analyses explore the impact of p-c equity awards on various CSR categories and strengths versus concerns. Our findings suggest that integrating p-c equity awards into CEO compensation frameworks effectively mitigate agency problem between shareholders and mangers, while also align the interests of stakeholders and shareholders, thereby fostering synergistic relationships between shareholder wealth and societal well-being.

Keywords: Corporate Social Responsibility, Performance-contingent Equity Awards, Shareholder Wealth, Social Well-being

Suggested Citation

Fu, Xudong and Tang, Tian, Aligning Incentives for Social Responsibility: Evidence from Performance-Contingent Equity Awards. Available at SSRN: https://ssrn.com/abstract=5115099 or http://dx.doi.org/10.2139/ssrn.5115099

Xudong Fu (Contact Author)

University of Louisville ( email )

Louisville, KY 40292
United States

Tian Tang

University of Louisville ( email )

United States
502-852-4819 (Phone)

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