CSR Contracting Policy: The Impact of CSR-linked Executive Compensation on Firm Reputational Risk

This study focuses on a fast-growing phenomenon in business in which many firms have linked their top executive compensations to various CSR criteria. Practitioners commonly refer to this as CSR contracting. We aim to investigate whether and how CSR contracting influences a firm’s reputational risk level. We argue that CSR contracting would mitigate a firm’s reputational risk. This is because CSR contracting helps prevent top executives’ controversial or illegal behaviours, improve CSR performance as impression management, and promote stakeholder engagement. We find support using panel data consisting of S&P 1500 firms between 2010 and 2021. In addition, we examine a few conditional variables for such an effect, including CEO duality, diversity commitment, and foreign sales intensity. These factors relate to the contemporary focus and debate of a large public firm – CEO power, diversity and inclusion, and foreign business. They also have important implications for both top management compensation and CSR initiatives. We use fixed-effect, mixed-effects, and population-averaged panel models to test our hypotheses. The contributions of our findings to CSR contracting are discussed.