Stock-based CEO compensation and corporate attention to social responsibility

In this paper, I examine how stock-based CEO compensation may affect corporate social performance (CSP) of the firm. CEOs who have an incentive to take large risks and pursue the maximum level of profit may not divert organizational resource into corporate social responsibility-related issues, which do not contribute to profit immediately. In addition to establishing a conceptual link between stock-based CEO compensation and CSP, this paper clarifies their relationship by addressing three empirical issues overlooked in previous studies. First, I examine the possible difference between cumulative and annual stock option grants. Second, I examine the unique effect of in-the-money stock options. Third, I show that accounting for firm-level unobserved heterogeneities makes a substantial difference in estimation results. The results reveal that the relationships between stock-based compensation and CSP are substantially different when unobserved heterogeneities are accounted for, that a single year''s stock option grant does not have a significant impact on CSP while a cumulative grant does, and that in-the-money and at-the-money stock options have opposite effects on CSP.