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Integration of CSR into CEOs’ compensation: effects on social and financial performance of French listed firms

Effets de l’intégration de critères RSE dans la rémunération des dirigeants sur la performance sociale et financière des entreprises françaises cotées
Laurence GODARD et Souhir KHEMIR
Cet article est une traduction de :
Effets de l’intégration de critères RSE dans la rémunération des dirigeants sur la performance sociale et financière des entreprises françaises cotées [fr]

Résumés

Basée sur l’approche de la gouvernance partenariale, cette recherche analyse la relation entre l'intégration de critères de responsabilité sociale de l’entreprise (RSE) dans la rémunération des dirigeants et la performance sociale et financière des entreprises du SBF 120 entre 2015 et 2019. Les résultats des régressions sur données de panel montrent que l'indexation de la rémunération des dirigeants sur des critères RSE a une influence positive uniquement sur la performance sociale. Enfin, cette dernière a un impact positif sur la performance financière et un effet médiateur entre l'intégration de critères RSE dans la rémunération des dirigeants et la performance financière.

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Notes de l’auteur

This article is published as part of the Special Issue of CIG 2022 - International Governance Conference, Clermont Auvergne University, France, November 2020. This special issue is the object of a partnership with the AAIG - International Academic Governance Association, and will be published in the issues of FCS as they are accepted.

Texte intégral

1. Introduction

  • 1 Law No. 2016-1691 of 9 December 2016 on transparency, the fight against corruption, and economic mo (...)
  • 2 Code of corporate governance for listed companies, created in 1995 jointly by AFEP (French private (...)

1CEOs’ compensation in listed firms has been the subject of fierce competition in Europe in recent years. In France, the Sapin 2 Law (2016)1 made the shareholders’ vote mandatory for executive compensation. A similar rule had already been included in the French AFEP-MEDEF code2, but it had two major limitations: the vote was only advisory, and the shareholders’ decision was restricted to remuneration for past work.

  • 3 Say on Pay is a corporate rule by which shareholders of a company are entitled to vote on executive (...)

2After several years of debate and repeated controversies over CEOs’ compensation in listed firms, general meetings of shareholders in France saw the introduction in 2017 of a binding “Say on Pay”3. The Sapin 2 Law introduced two binding annual votes for listed firms, one ex-ante on CEOs’ compensation policy going forward from 2017, the other ex-post on the compensation awarded for the previous financial year, applicable from 2018. In addition to fixed and variable compensation, the vote covers the awarding of free shares, the granting of share subscription or purchase options, exceptional remuneration, attendance fees, non-competition indemnities, and benefits in kind.

3In the event of a negative result in the ex-ante vote, the board of directors is required to submit a new compensation proposal to the next general meeting, failing which the old compensation policy continues to apply. In the ex-post vote, which did not come into effect until 2018, a negative vote would result in no payment of the CEOs’ variable compensation awarded for the past financial year.

  • 4 The Observatory of Corporate Social Responsibility.

4“Say on Pay” introduces stricter requirements regarding CEO compensation policy, namely the compensation structure, the financial and social objectives for each type of compensation, and the target objectives for assessing them. As a result, there has been a real rise in the integration of Corporate Social Responsibility (CSR) into French CEO compensation policies. In 2015, 70% of firms in the French CAC 40 index included CSR criteria in their CEO compensation policy, as against just 10% in 2006 (study by Orse4 and PwC, 2017). Flammer et al. (2019) consider that including CSR criteria in CEO compensation as a recent practice is becoming increasingly prevalent in corporate governance.

5However, the question arises of the extent to which integrating CSR criteria into CEO compensation reflects a genuine desire on the part of firms to meet the expectations of all their stakeholders in terms of transparency and long-term value creation. Assessing the effectiveness of integrating CSR into CEO compensation implies an understanding of the relationship between such integration and the corresponding social and financial performance. Compensation systems are important through their symbolic impact. They are a visible signal of the types of behavior that are being encouraged in leaders.

6Based on the stakeholder model of corporate governance, this research seeks to analyze the relationship between the integration of CSR into CEO compensation and corporate social and financial performance. It aims to update, in the French context, the influence of the inclusion of CSR criteria in CEO compensation policies on corporate performance.

7However, to our knowledge, there is no research that examines the importance of the two directions of causality at the same time. This question deserves to be examined in order to tackle the issue of the endogeneity of the relationships between social performance and CSR-based CEO compensation. The study of the question of double causality makes it possible to focus on the underlying dynamic: is it that firms with a high CSR level choose to integrate CSR into CEO compensation or that integrating CSR criteria into CEO compensation has an impact on their CSR behavior?

8In addition, within the framework of a stakeholder-based governance approach, we examine the effect of the CEO compensation system not only on the satisfaction of shareholders’ interests, through its influence on corporate financial performance, but also on the satisfaction of other stakeholders’ interests through its influence on corporate social performance. In this context, the proposed model introduces a mediating analysis of social performance between the integration of CSR into CEO compensation and financial performance. It is assumed that the integration of CSR into CEO compensation has an impact on corporate social performance which, in turn, has an impact on corporate financial performance. The direct and indirect effects will then be measured to verify whether social performance plays the role of mediating variable.

9This paper has five parts. First, we set out the theoretical framework. Second, we present the research hypotheses. Third, we describe the method used. Then, we report and interpret the results of the statistical tests. Finally, we set out the contributions, the limitations, and the avenues for future research.

2. Theoretical framework: stakeholder model of corporate governance

10Two largely distinct corporate governance models capable of framing and controlling the actions of CEOs are traditionally presented. One is the so-called shareholder model, the other, the so-called stakeholder model.

11Focused initially on the agency framework designed between CEOs and shareholders, attention has broadened to take into account all the stakeholders involved in the value chain (Charreaux and Desbrières, 1998). CEOs then become agents of all stakeholders. In the stakeholder model of corporate governance, the firm must take into account any individual or group of individuals who may affect or be affected by the achievement of organizational objectives (Freeman, 1984). The aim is therefore to take into account the aspirations of the various stakeholders. The stakeholder model of corporate governance raises the question of the legitimacy of each of the stakeholders and the modalities of conflict resolution in the event of disagreement. As a result, the stakeholder-based governance approach aims to protect and satisfy the interests of stakeholders which is important for the firm’s survival, unlike the shareholder model of corporate governance which defends the interests of shareholders alone.

12The main contribution of the stakeholder-based governance approach is to show that internal regulation cannot be thought of in an autonomous manner, ignoring the external constraints that weigh on the firm. Governance mechanisms must be put in place in such a way as to reduce the magnitude of agency costs as much as possible, taking into account the characteristics of the principal-agent relationship (Fama, 1980). Many internal and external, formal and informal mechanisms are recommended (Charreaux, 1997; Wirtz, 2011), including the compensation system.

13Compensation is likely to discipline executives to protect the interests of some stakeholders, including shareholders. Competent CEOs are now facing changes in their compensation and incentive systems to intensify or change the direction of their efforts. Any calling into question of a CEO’s competence should lead to dismissal, but it is likely that a board of directors will first adjust the CEO’s compensation package. A board of directors conducts a rigorous selection process to choose the top manager. Thus, if only to justify its selection process, the board will be reluctant to question a choice once made.

2.1. Integration of CSR into CEO compensation and corporate performance

14Within the framework of the stakeholder model of corporate governance, we study the impact of the integration of CSR into CEO compensation on corporate performance (social and financial performance) in order to take into account both the interests of shareholders and those of other stakeholders. There is little empirical research on the use of CSR objectives in CEO compensation and their effect on social and financial performance (Berrone and Gomez-Mejia, 2009).

2.1. Integration of CSR into CEO compensation and social performance

15CEOs are encouraged to incorporate ethical and social standards into their decisions. They bear a moral responsibility toward stakeholders, and they take into consideration issues of justice and equality in the distribution of the firm’s wealth. Compensation that incorporates CSR criteria can also motivate a CEO to manage according to values such as modesty and moderation, which is in line with CSR commitment. Hong et al. (2016) found that taking CSR into account for CEO compensation had an impact on corporate social performance. They found that firms with governance that was more favorable to shareholders were more likely to encourage their CEOs to engage in CSR. In addition, firms offering CSR-related compensation have on average higher levels of social performance, suggesting that granting CSR incentives led to more CSR activities. According to Khondkar et al. (2018), the fiduciary behavior of CEOs in terms of CSR helps to reduce the agency problems and optimize corporate value. For Maas (2018), to address potential conflicts between investors’ triple-bottom-line expectations and executive performance, firms can use incentives by integrating corporate social performance objectives with CEO compensation. She found that integrating CSR criteria into CEO compensation was likely to result in better social performance. CEOs seem to be more incentivized to take a socially responsible approach when their compensation is based on CSR criteria. Insofar as the compensation system helps align the interests of CEOs with those of shareholders (Jensen and Murphy, 1990), it can also be a way to satisfy the interests of different stakeholders. Thus, the inclusion of CSR criteria in CEO compensation should help promote social performance. Engaging in a CSR approach reflects firms’ desire for a more global performance and provides a better overview of performance.

16Hence, the compensation systems should include, alongside financial incentives, extra-financial incentives, in order to meet the expectations not only of shareholders but of all stakeholders. According to Baraibar-Diez et al. (2019), the integration of sustainability indicators into CEO compensation policies reflects a firm’s desire to orient its CEO’s behavior toward long-term objectives, responding to a large number of stakeholders with different requirements. Analyzing listed firms in Spain, France, Germany, and the United Kingdom during the period 2005–2015, they examined the relationship between compensation policy and environmental, social, and corporate governance (ESG) scores. They tested whether linking compensation policy to ESG indicators implied higher economic and ESG scores. They found that the integration of sustainability indicators in CEO compensation was likely to affect ESG scores, especially when firms had a corporate social responsibility committee, which acted as a control mechanism, enabling the achievement of more sustainable performance objectives.

17H1a: The integration of CSR into CEO compensation has a positive influence on social performance.

2.2. Integration of CSR into CEO compensation and financial performance

18In the corporate governance framework, individuals are expected to respond directly to changes in incentives. Competent CEOs face changes in their compensation and incentive systems to intensify or change the direction of their efforts. While CSR is a key factor in determining CEO compensation, it should have an impact on their engagement in social practices and ultimately on financial performance. We suppose that the board of directors chooses the appropriate types of compensation to align their interests with those of the shareholders.

19As a potential agency cost, CSR can thus be used to advance the personal interests of CEOs versus shareholder interests (Hong et al., 2016). According to Chan and Ma (2017), although the implementation of environmental strategies is likely to strengthen shareholders’ interest in the long term, the uncertainties inherent in this implementation could nevertheless discourage CEOs from acting, so as to protect their personal interests. This difference reflects the classical agency problem, the solution of which depends on how CEOs (the agents) are given the appropriate types of compensation to align their interests with those of the shareholders (the principal).

20Authors such as Freeman (1984) and Donaldson and Preston (1995) argue that corporate value depends on the interests of all the stakeholders, and firms that care about all their stakeholders, all other things being equal, will perform better than those that do not. Since CSR encompasses very different activities (human resources, environment, community, human rights, etc.), it has received a great deal of attention as having a potential role in resolving conflicts between stakeholders (Calton and Payne, 2003; Cespa and Cestone, 2007; Harjoto and Jo, 2011; Jensen, 2002; Jo and Harjoto, 2011a; Jo and Harjoto, 2011b; Scherrer et al., 2006). The integration of CSR into CEO compensation mitigates corporate risk (strikes, turnover, etc.) through a lower risk of conflict between the CEO and the stakeholders.

21Based on a sample of 212 firms from among FTSE 350 firms over the period 2009–2011, Abdelmotaal and Abdel-Kader (2016) demonstrated a significant relationship between integrating sustainability incentives into CEO compensation and shareholder return. We predict a positive influence of the integration of CSR into CEO compensation on corporate financial performance.

22H1b: The integration of CSR into CEO compensation has a positive influence on financial performance.

2.1.3. Link between social performance and financial performance

23To date, empirical studies do not allow us to conclude clearly and definitively either that there is a stable and unambiguous relationship between social performance and financial performance or as to the direction of causality and the nature of the link: positive or negative.

24A review of the research on this issue seems to suggest there is a positive link between social and financial performance (Allouche and Laroche, 2006; Margolis and Walsh, 2003). However, other conceptual models (e.g., McWilliams and Siegel, 2001) hypothesize that there is no link between the two dimensions. Indeed, McWilliams and Siegel (2001) propose a supply and demand model of social responsibility that helps explain the lack of consensus in the empirical results obtained by academic studies. Market equilibrium cancels out the costs and profits generated successively. This approach leads to a hypothesis of neutral interactions between social and financial performance.

25Other authors have suggested more complex positive links between the two dimensions. Indeed, Bowman and Haire (1975) and, more recently, Barnett and Salomon (2002) have highlighted a non-linear relationship in the form of an inverted U between social performance and financial performance, indicating an optimum level beyond which financial performance no longer improves.

26In this part, we hypothesize a link between corporate social performance and financial performance, allowing us to consider the existence of a mediating role of social performance between the integration of CSR into CEO compensation and financial performance. This hypothesis can be justified by the link between social and financial performance (Artiach et al., 2010). Deckop et al. (2006) found that financial performance was positively related to social performance regardless of the compensation measure used (short or long-term compensation). Thus, if integration of CSR into CEO compensation affects social performance favorably, social performance will, as a result, affect financial performance and then play the role of a mediating variable. There are three dominant trends in this area. First, researchers suggest that the financial benefits from investing in CSR outweigh the costs (McGuire et al., 2003). Second, for advocates of stakeholder theory, investing in CSR generates positive financial benefits from stakeholder management (Freeman, 1984). Meeting stakeholder expectations is likely to improve the firm’s reputation and, consequently, its financial performance (Waddock and Graves, 1997). According to Margolis et al. (2009), a strong commitment to CSR can help improve corporate financial performance. Finally, resource theory argues that the firms that invest in CSR are the ones with more resources (Waddock and Graves, 1997). This theory suggests also that only firms with sufficient resources have the capacity to invest in CSR and predicts that social performance is positively related to financial performance.

27H2a: Social performance has a positive influence on financial performance.

28H2b: Financial performance has a positive influence on social performance.

2.4. Impact of social performance on the integration of CSR into CEO compensation

29However, some studies focus on the reverse relationship and examine how corporate engagement in CSR affects CEO compensation (Cai et al., 2011; Jian and Lee, 2015; Khondkar et al., 2018; Rekker et al., 2014). The absence of any research that simultaneously examines the importance of the two directions of causality between the integration of CSR into CEO compensation and corporate social performance justifies the analysis of the reverse relation, i.e., the influence of social performance on the integration of CSR into CEO compensation.

30To test the conflict resolution hypothesis, based on stakeholder theory, Cai et al. (2011) empirically examined the impact of CSR on CEO compensation using a sample of US firms between 1996 and 2010. After controlling for the various corporate characteristics, they found that the shift in CSR negatively affected both total compensation and cash compensation. Their results support the conflict resolution hypothesis. In the same way, Rekker et al. (2014) examined the impact of CSR on CEO compensation. They showed that there was a negative relationship between total CEO compensation and corporate socially responsible commitment: a strong commitment to a socially responsible approach was likely to lead to a reduction in CEO compensation. Likewise, Jian and Lee (2015) found that CEO compensation was negatively associated with CSR investments, especially in the best-governed firms, and concluded that CEOs received a lower level of compensation for an excessive investment in CSR. Analyzing the explanatory factors for CEO compensation of Indonesian listed firms in the mining sector, Fondas et al. (2017) found that CSR had a positive, significant influence on CEO compensation. Khondkar et al. (2018) analyzed how CSR activities were associated with the CEO compensation structure. They showed that corporate social performance was negatively associated with the proportion of cash-based compensation, but positively associated with the proportion of share-based compensation. According to the authors, CEOs consider a firm’s social performance as a business activity that improves the firm’s value and relationships with shareholders, and thus they are compensated for their commitment to CSR.

31H3: Social performance has a positive influence on the integration of CSR into CEO compensation.

Figure I. Summary figure of research hypotheses

Figure I. Summary figure of research hypotheses

32ICSR: integration of CSR into CEO compensation; FPER: corporate financial performance; SPER: corporate social performance

3. Method

33The purpose of this research was not only to analyze the influence of integrating CSR criteria into CEO compensation (ICSR) on social (SPER) and financial (FPER) performance but also to focus on the reverse relationship and examine how SPER affects ICSR and mediates the link between ICSR and FPER. First, we justify the choice of our sample. Then we present the study models and measurements of variables.

3.1. Sample

34The initial sample selected for our research was composed of firms listed in France’s SBF 120 stock market index from 2015 to 2019. We excluded banks, insurance companies, and real estate firms from the sample because of the specific features of their accounting. The final selected sample comprised 97 firms over 5 years. These firms come from different sectors according to the sector classification of the Global Industry Classification Standard (GICS). In order to avoid the number being very limited by sector, firms were classified/grouped into four sectors. The distribution of firms by sector is presented in Table I.

Table I. Distribution of the sample firms by sector

Table I. Distribution of the sample firms by sector

35N: number of firms in each sector;%: percentage of firms belonging to each sector.

    1. Study models

36To analyze the influence of integrating CSR criteria into CEO compensation on financial and social performance, we tested the following five empirical models:

37Model 1: SPERit= ait + β1 ICSRit + β2 Sizeit + β3 FCFit + β4 DEBit + β5 INDit + eit

38This first model describes the impact of integrating CSR into CEO compensation on social performance.

39Model 2: FPERit= ait + β1 ICSRit + β2 Sizeit + β3 FCFit + β4 DEBit + β5 INDit + eit

40This second model describes the influence of integrating CSR into CEO compensation on financial performance.

41Model 3: FPERit= ait + β1 SPERit + β2 ICSRit + β3 Sizeit + β4 FCFit + β5 DEBit + β6 INDit + eit

42This third model describes the impact of social performance and of integrating CSR into CEO compensation on financial performance.

43Model 4: SPERit= ait + β1 FPERit + β2 ICSRit + β3 Sizeit + β4 FCFit + β5 DEBit + β6 INDit + eit

44This fourth model describes the impact of financial performance and of integrating CSR into CEO compensation on social performance.

45Model 5: ICSRit= ait + β1 SPERit + β2 Sizeit + β3 FCFit + β4 DEBit + β5 INDit + eit

46This fifth model describes the influence of social performance on integrating CSR into CEO compensation.

47SPER it= Social Performance

48FPER it= Financial Performance

49ICSR it= Integration of CSR criteria into CEO compensation

50Size it= Size of the firm

51FCF it= Available cash flow

52DEB it= Level of debt

53IND it= Industry membership

54eit= Residuals

55The subscripts i and t of the explanatory variables and the response variable correspond respectively to the firm and the period of study.

3.2. Measurements of variables

3.3.1. Dependent and independent variables

56- Social Performance (SPER): We used social rating, i.e., overall score as a measure of social performance. Data on social performance were provided by the organization for sustainable performance measurement, social and environmental analysis, and social rating Vigeo-Eiris5. Vigeo rates each firm according to six criteria: human resources, business behavior, corporate governance, human rights, environment, and community involvement. According to Barnea and Rubin (2010), CSR ratings are a reasonable indicator of CSR expenses.

57- Financial Performance (FPER): According to Scholtens (2008), there is no consensus as to the measurement of financial performance. The review of the literature on the choice of performance measures reveals a wide variety of performance indicators. According to Charreaux (1991), the choice of indicators depends on whether the objective is to maximize the value of equity or the overall value of the firm. The first approach is the most common in financial theory and leads to an assessment of performance from the point of view of shareholders. Like Cohen et al. (1995), we measured financial performance using return on equity (ROE). This indicator was collected from the Datastream and Worldscope databases.

58- Integration of CSR criteria into CEO compensation (ICSR): As in Baraibar-Diez et al. (2019), the integration of CSR criteria into CEO compensation (ICSR) was a binary variable scored 1 if the firm included CSR criteria in its CEO’s compensation and 0 otherwise. Article 225 of the Grenelle II Law requires French firms to publish information on their social responsibility commitment. This variable was manually coded from the reference documents collected from 2015 to 2019 available on the websites of the firms studied. Among the CSR criteria integrated into CEO compensation, we identified: “variable compensation which contains 40% of extra-financial criteria, in particular related to the progress of the Sustainable Development program Sharing Beauty With All and the implementation of the Human Resources and digital development policy” (L'Oréal, 2017), and variable compensation “for 50%, on the achievement of individual qualitative objectives (quality of governance and Corporate Social Responsibility, these objectives accounting for half respectively)” (Carrefour, 2017).

3.3.2. Control variables

59The control variables relate to certain characteristics of firms. According to Roberts (1992), several corporate characteristics can influence performance:

60- Size of the firm (Size): In the literature, it has been widely demonstrated that there is a positive association between firm size and performance. Large firms most often attract marked public attention, which can motivate them to improve their performance. Size is measured by the logarithm of total assets.

61- Cash flow (FCF): When economic resources are scarce, a firm is compelled to prioritize economic demands at the expense of social claimants. Thus a high free cash flow (FCF) indicates that the firm has sufficient financial capacity to invest in CSR without this harming other domains.

62- Level of debt (DEB): Roberts (1992) considers that debt is likely to encourage a firm to engage in social activities to meet the expectations of its creditors as to its social role. It is measured by the Financial Debts / Total Assets ratio.

63- Industry membership (IND): In the literature, it has been shown that commitment to a socially responsible approach varies according to the sector of activity. Belonging to activity sectors that are highly sensitive to the environment is likely to guide the firm’s CSR involvement and therefore its performance (Patten, 1992). Industry membership is a binary variable scored 1 if the firm belongs to the selected industry and 0 otherwise.

64Control variables were collected from the Datastream and Worldscope databases.

65The measurements of the dependent, independent, and control variables are presented in Table II.

Table II. Summary table of model variable measurements

Table II. Summary table of model variable measurements

4. Results

66To analyze the relationships between the integration of CSR into CEO compensation and financial and social performance of French listed firms, we conducted a univariate analysis and a panel data regression.

4.1. Descriptive statistics

67The sample in our study presents the distribution characteristics summarized in Table III.

Table III. Descriptive statistics

Table III. Descriptive statistics

SPER: social performance; FPER: financial performance; Size: size of the firm; FCF: free cash flow; DEB: level of debt; ICSR: integration of CSR criteria into CEO compensation.

68Table III shows that on average 40.82% of the firms integrated CSR criteria into CEO compensation between 2015 and 2019. This integration evolved from 2015 to 2019 with ever more firms indexing CEO compensation on CSR criteria.

69In Figure II, we see that 63% of SBF 120 firms incorporated CSR criteria into CEO compensation in 2019, as against just 13% in 2015.

Figure II. Integration of CSR into CEO compensation from 2015 to 2019

70With respect to the performance variables, we found that the return on equity mean was of the order of 8.18 (range −132.22 to 90.60). The social rating mean was 49.71 (standard deviation 11.87). French SBF 120 firms had a logarithm of total assets mean of 6.93 over the period 2015–2019 with a dispersion of 0.65. The cash-flow mean was €2.70 million, with a negative minimum of −€9.36 million and a maximum of €21.76 million. The debt ratio mean was 29.03 % (standard deviation 15.64 %).

4.2. Univariate analysis results

71The purpose of the univariate analysis was to compare the characteristics of firms that did or did not integrate CSR into CEO compensation. Table IV compares the variables of our models between firms according to whether they integrated CSR criteria into CEO compensation (ICSR= 1) or not (ICSR= 0). Besides the mean and standard deviation, the non-parametric Mann-Whitney average comparison test is presented.

Table IV. Results of univariate analysis

Table IV. Results of univariate analysis

*** statistically significant at the 1% level.

72The firms in our sample were split into two groups according to whether they included CSR criteria into CEO compensation (ICSR= 1) or not (ICSR= 0); SPER: social performance; FPER: financial performance; Size: size of the firm; FCF: free cash flow; DEB: level of debt; ICSR: integration of CSR criteria into CEO compensation.

73Table IV shows statistically significant differences at the 1% threshold between the two groups of firms for social performance (SPER), size (Size), and cash flow (FCF). On average, social performance was higher for firms integrating CSR into CEO compensation (54.97) than for those that did not integrate it (45.15).

74The two groups of firms differed on average in size and cash flow. Firms that incorporated CSR criteria into CEO compensation had on average a slightly higher logarithm of total assets (7.22) than those that did not (6.73).

75Firms that integrated CSR into CEO compensation policies had a cash flow mean of 2.89, slightly higher than that of other firms (2.56). No difference in average was observed for the variables financial performance (ROE) and level of debt (DEB). Larger firms are exposed to more public attention. Being subject to greater pressure, they are thus encouraged to engage in a socially responsible approach and therefore to integrate CSR criteria into CEO compensation.

4.3. Panel data regression results

76Our research is based on data structured in the form of a panel combining the temporal and individual dimension. To estimate our models, we used econometric techniques for estimating panel data. This estimation method makes it possible to specify whether the individual effect observable for each firm is fixed or random.

77Since we had a sample of panel data, we started by performing a homogeneity test to check whether the specification of the data generating process is homogeneous or heterogeneous.

Table V. Homogeneity test results

Table V. Homogeneity test results

D-V: dependent variable; SPER: social performance; FPER: financial performance; ICSR: integration of CSR criteria into CEO compensation.

78Table V shows that the p-values of the five models were significant. The hypothesis of homogeneity is therefore rejected in favor of that of heterogeneity. We can conclude that there are specific features for each firm in the sample, and so the effects vary according to the firm. Two models address the problems of heterogeneity, namely the random-effects model and the fixed-effects model. The specific effects were therefore tested using the Hausman test. This test lets us verify the existence of correlations between the explanatory variables and the individual effects and discriminate between the fixed-effects model and the random-effects model. To determine which model should be chosen, we present the test for specifying individual effects, the Hausman test.

Table VI. Hausman test results

Table VI. Hausman test results

** statistically significant at the 5% level.

D-V: dependent variable; SPER: social performance; FPER: financial performance; ICSR: integration of CSR criteria into CEO compensation.

79We see from Table VI that the Hausman test was not significant for the first and fourth models (p-value greater than 5%). The random-effects model was therefore preferable to the fixed-effects model. By contrast, for the second, third, and fifth models, according to the Hausman test, the estimator of the fixed-effects model was more appropriate than that of the random-effects model (p-value lower than 5%).

80Before testing our research hypotheses, we checked whether the regression analysis fulfilled the classical criteria of autocorrelation and multicollinearity. Table VII presents the Pearson correlation coefficients between variables of the models.

Table VII. Correlation analysis

Table VII. Correlation analysis

Significance levels: *** (p < 0.01); ** (p < 0.05); * (p < 0.1).

SPER: social performance; FPER: financial performance; ICSR: integration of CSR criteria into CEO compensation; Size: size of the firm; FCF: free cash flow; DEB: level of debt.

81Integration of CSR criteria into CEO compensation (ICSR), size (Size), and FCF variables were positively correlated with social performance (SPER) and financial performance (FPER). By contrast, the level of debt (DEB) variable was negatively correlated with both social performance (SPER) and financial performance (FPER). By examining the relationships between the independent variables themselves, the results of the VIF (Variance Inflation Factors) test revealed that multicollinearity was not a problem for the application of analysis techniques.

82Our research hypotheses were tested using the panel data regression method. We performed a logistic regression with panel data for model 5. Actually, the objective in specifying the five research models was to determine whether a firm’s decision to integrate CSR criteria into its CEO’s compensation was likely or not to influence its social and financial performance, and vice versa, whether social performance was likely to affect the inclusion of CSR indicators in CEO compensation. Table VIII presents the results of the panel data regression with random effects for models 1 and 4 and fixed effects for models 2, 3, and 5.

Table VIII. Results of panel data regression

Table VIII. Results of panel data regression

Significance levels: *** (p < 0.01); ** (p < 0.05); * (p < 0.1).

D-V: dependent variable; SPER: social performance; FPER: financial performance; ICSR: integration of CSR criteria into CEO compensation; Size: size of the firm; FCF: free cash flow; DEB: level of debt; IND: industry sector.

83Model 1 was used to estimate hypothesis H1a, which is that the integration of CSR into CEO compensation has a positive influence on social performance. In Table VIII, the results of model 1 show that the explanatory variable ICSR and the Size control variable were significant and explained 59.5% of social performance. Our model appears to be correctly specified, with a Fisher test statistically significant at the 1% threshold. The ICSR variable had a significant, positive influence on social performance. The supposed meaning of this influence was verified. Thus, as in our hypothesis H1a, the indexation of CEO compensation based on CSR criteria was likely to favor obtaining a good social rating. Hypothesis H1a is validated. This result is consistent both with the results of Hong et al. (2016) according to which the integration of CSR objectives into CEO compensation is likely to improve corporate social performance and with those of Maas (2018) who has shown that taking quantitative, hard CSR criteria into account in CEO compensation leads to better corporate social performance. The Size control variable had a significant impact on social performance. Large firms are more visible to the public and have more resources to engage in a CSR approach and meet social expectations.

84As seen in Table VIII, model 2 was significant. The R2 adjusted was 0.0647. This means that the independent and control variables accounted for 6.47% of the variability of financial performance. The Wald Chi2 test had a value of 15.88 with a p-value < 0.01. Overall, the analysis of the results of model 2 confirms a positive but non-significant effect of the ICSR variable on corporate financial performance. The impact of integrating CSR into CEO compensation on financial performance is thus not validated. Hypothesis H1b is therefore rejected. This is in line with the results of Cai et al. (2011). However, it conflicts with those reported by Barnea and Rubin (2010). For the control variables, only the FCF had a non- significant impact on financial performance.

85The objective of models 3 and 4 was twofold, it consisted on the one hand in looking for a link between financial performance and social performance and on the other hand, in confirming or reversing the results of models 1 and 2 relating to the influence of integration of CSR into CEOs' compensation on social and financial performance. The estimation of model 3 yielded results comparable to model 2 with respect to the control variables and the ICSR variable. The results show a non-significant impact of integration of CSR into CEOs' compensation on financial performance. This confirms the previous results of model 2 and does not allow us to validate hypothesis H1b. Moreover, the social performance had a positive and significant influence on financial performance. High social performance is likely to meet stakeholder expectations and therefore improve awareness of the firm, which positively influences financial performance (Cornell and Shapiro, 1987). Thus, hypothesis H2a is validated. The analysis of model 4 leads to a positive and significant impact of integration of CSR into CEOs' compensation on social performance in accordance with the results of model 1. Conversely, it shows a non-significant influence of financial performance on social performance. Hypothesis H2b is not validated. As mentioned earlier, the relationship between financial performance and social performance is not clearly established (direction of causality and nature of link). Our results suggest that there is no impact of financial performance on social performance, following the example of McWilliams and Siegel (2001).

86We examined the causal link between social performance and financial performance using the Granger causality test based on the VAR model. Causality is interpreted, in the sense of Granger (1969), since knowledge of the past (delays) of one variable can improve the prediction of another (or the second). According to Granger’s principle of causality, a variable X can cause a variable Y, if Y can be better predicted by using the history of X and Y at the same time rather than using the history of Y alone. In other words, one variable causes another, if knowing the past of the first improves the prediction of the second. We sought to verify the null hypothesis of non-causality from financial performance to social performance and in the opposite direction as well. The results of this test are presented in Table IX.

Table IX. Results of the Granger causality test between financial performance and social performance

Table IX. Results of the Granger causality test between financial performance and social performance

: sense of non-causality

87By analyzing the causal link between SPER and FPER, we obtain that the null hypothesis stating that "lagged values of SPER do not cause FPER" can be rejected at a significance level by 10% as corresponding p-value is lower than 0.10 (p -value= 0.08 < 10%).

88Contrary, because of the p-value for FPER (0.12) is greater than 10%, lagged values of FPER do not cause SPER. This implies that SPER causes FPER. Conversely, FPER does not cause SPER. Thus, there is no reciprocal influence between financial and social performance since the link was checked only in one direction, that of the impact of SPER on FPER.

89The results obtained refer us to the possible existence of an indirect relation between the integration of CSR criteria into CEO compensation and financial performance via social performance since the integration of CSR criteria into CEO compensation positively influences social performance, (H1a), which itself positively affects financial performance (H2a).

90In order to test the mediating effect of social performance between the integration of CSR criteria into CEO compensation and financial performance (the indirect effect of ICSR on FPER through the mediator of SPER), we used the bootstrapping approach recommended by Preacher and Hayes (2008). This is a very robust approach that goes beyond the limits of the sequential causal approach of Baron and Kenny (1986). The latter has been questioned by several researchers (Fritz and MacKinnon, 2007; MacKinnon et al., 2002; Zhao et al., 2010) in particular because it requires a statistically significant total effect of the independent variable X on the dependent variable Y. This condition is essential so that the mediation can be tested and considered as statistically significant. In this sense, many recent methodological research have shown that the effect of mediation can be significant even when the total effect is not (Fritz and MacKinnon, 2007; Kenny and Judd, 2014; O’Rourke and MacKinnon, 2015; O’Rourke and MacKinnon, 2018).

91According to the approach of Preacher and Hayes (2008), the only condition for the existence of a significant indirect effect is based on a bootstrap 95% confidence interval that excludes zero.

92Table X presents the results of the test of the effect of mediation of social performance between integration of CSR criteria into CEO compensation and financial performance.

  • 6 All control variables were introduced in the mediation analysis. To simplify the presentation and n (...)

Table X. Test of the mediating effect of the social performance according to the approach of Preacher and Hayes (2008)6

Table X. Test of the mediating effect of the social performance according to the approach of Preacher and Hayes (2008)6

Significance levels: *** (p < 0.01); ** (p < 0.05); * (p < 0.1).

ICSR: integration of CSR criteria into CEO compensation; SPER: social performance; FPER: financial performance.

93The results in Table X show that the indirect effect of the integration of CSR into CEO compensation on financial performance, mediated by social performance is statistically significant (z= 1.90; CI= [0.0026; 4.5666]). The results indicate that the direct effect is not significant (z= -0.71). Thus, SPER mediates the relationship between ICSR and FPER. Mediation is an indirect-only mediation. According to Zhao et al. (2010) mediation is indirect-only when the indirect effect is significant while the direct effect is not. This mediation overlaps with Baron and Kenny’s (1986) full mediation. The mediating effect of the SPER variable is thus established in accordance with the bootstrapping approach recommended by Preacher and Hayes (2008). This means that the relation between the integration of CSR into CEO compensation and financial performance is totally indirect. The integration of CSR into CEO compensation influences financial performance via social performance.

94The results obtained from the analysis of model 5 indicate that social performance has a non- significant effect on the integration of CSR criteria into CEO compensation. Hypothesis H3 is therefore not validated. Firms with a high level of social performance do not necessarily choose to integrate CSR criteria into CEO compensation. Among the control variables, only size is positively related to the ICSR.

95In order to study the relationship between social performance and the integration of CSR criteria into CEO compensation, we again applied the Granger causality test. The results relating to the causality of ICSR towards SPER are exposed in the following table XI.

Table XI. Results of the Granger causality test between the integration of CSR criteria into CEO compensation and social performance

Table XI. Results of the Granger causality test between the integration of CSR criteria into CEO compensation and social performance

: sense of non-causality

96The analysis of the results shows that the null hypothesis of non-causality of ICSR towards SPER is rejected at a significance level by 10% (p-value= 0.10= 10%). Thus, we can conclude that ICSR improves SPER. On the other hand, by testing the reverse causality link, from SPER to ICSR, the null hypothesis of non-causality is retained. We can confirm that ICSR improves SPER prediction but not the other way around.

5. Discussion and conclusion

97The main purpose of this research was to empirically analyze the integration of CSR criteria into CEO compensation of French SBF 120 firms from 2015 to 2019 and to examine its effect on financial and social performance. The analysis shows that the integration of CSR into CEO compensation was marked by an increase from 2015 to 2019. The panel data regression results show that the focus on CSR through CEO compensation is likely to improve social performance. However, it has no direct influence on corporate financial performance. The results also show that social performance positively influences financial performance and that it is an important lever in the relationship between the integration of CSR criteria into CEO compensation and financial performance. From this point of view, they confirm the existence of an indirect link between the introduction of CSR objectives into CEO compensation and financial performance. Meeting stakeholder expectations helps improve the firm’s reputation (Freeman, 1984) and consequently its financial performance (Waddock and Graves, 1997). Likewise, Hong et al. (2016) showed that CSR was important for increasing shareholder value and had financial benefits for firms and shareholders. In this line, Li et al. (2016) found that CSR activities were rewarding in that as firms engaged in more CSR activities, their value increased. Conversely, we did not obtain an impact of financial performance on social performance. This result is consistent with those of McWilliams and Siegel (2001). Regarding the analysis of the reverse relationship between social performance and the integration of CSR objectives into CEO compensation, the results were not significant, according to Maas (2018). Thus, the relationship between the introduction of CSR indicators into CEO compensation and social performance goes in one direction, that of improving social performance by index linking CSR criteria to CEO compensation.

98The first contribution of this study is the context in which it is carried out. Indeed, this study is conducted in the French context, with the adoption of the Sapin 2 Law (2016) which made the shareholders’ vote mandatory for executive compensation. In this context, the granting of additional power to shareholders could have led to them rejecting any integration of CSR criteria into CEO compensation so as to protect their own interests to the detriment of other stakeholders. This is not the case. Shareholders seem to be aware of the importance of CSR for long-term value creation. With regard to the various stakeholders, a better understanding of the behavior of firms with regard to the integration of CSR into their compensation policies can help them refine their analysis of relevant corporate strategic approaches and better formulate their expectations in the field.

99Next, this study is more comprehensive than existing studies as it examines two reciprocal relationships at once. Indeed, it addresses the question of the underlying dynamics between social performance and the integration of CSR into CEO compensation, through the study of the question of a reciprocal relationship between CSR integration into compensation and social performance. At the same time, it examines the question of the meaning of the relationship between social performance and financial performance. This vision allows us to understand the indirect relationships that may exist between these three variables. To our knowledge, all of these relationships have never been examined at the same time in the same research. The importance of the role of compensation with respect to CSR is highlighted. Thus, policy makers and legislators could intensify its use to promote strategic decisions towards CSR. It would be a full-fledged tool that can help firms to participate in the ecological transition.

100Last, in terms of theory, this research focuses on CEO compensation as an important part of corporate governance. Corporate governance with CEO compensation plays an important role in monitoring and counseling management’s decision-making including investing in strategic sustainability and helping to better protect firms against distorted behavior of CEOs. Understanding the role of corporate governance may help top management of corporations allocate their limited resources in their strategic planning and decision-making.

101This research has some limitations. First, a dummy variable was used to measure the integration of CSR into CEO compensation. More details are now needed on the integration of CSR criteria into CEO compensation: for example, what percentage of variable compensation depends on CSR criteria? For this study, a more precise measure was not used because the information was not necessarily available at the time for French firms, as shown in the study by Baraibar-Diez et al. (2019). It would be useful to replicate our approach using other indicators for CSR compensation so as to examine the metric more closely.

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Notes

1 Law No. 2016-1691 of 9 December 2016 on transparency, the fight against corruption, and economic modernization.

2 Code of corporate governance for listed companies, created in 1995 jointly by AFEP (French private businesses association) and MEDEF (French employers’ federation) and containing a set of recommendations defining the principles of good corporate governance.

3 Say on Pay is a corporate rule by which shareholders of a company are entitled to vote on executive compensation.

4 The Observatory of Corporate Social Responsibility.

5 https://esg.moodys.io

Vigeo, which is a rating agency, was founded in 2002. Vigeo and the British agency Eiris (Ethical Investment Research Service) merged in 2015 to form the Vigeo Eiris group, and in 2019 Moody's became the major shareholder of Vigeo-Eiris.

6 All control variables were introduced in the mediation analysis. To simplify the presentation and not overload the table, we have chosen not to present the results relating to these variables.

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Table des illustrations

Titre Figure I. Summary figure of research hypotheses
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Titre Table I. Distribution of the sample firms by sector
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Titre Table II. Summary table of model variable measurements
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Titre Table III. Descriptive statistics
Légende SPER: social performance; FPER: financial performance; Size: size of the firm; FCF: free cash flow; DEB: level of debt; ICSR: integration of CSR criteria into CEO compensation.
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Titre Table IV. Results of univariate analysis
Légende *** statistically significant at the 1% level.
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Titre Table V. Homogeneity test results
Légende D-V: dependent variable; SPER: social performance; FPER: financial performance; ICSR: integration of CSR criteria into CEO compensation.
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Titre Table VI. Hausman test results
Légende ** statistically significant at the 5% level.
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Titre Table VII. Correlation analysis
Légende Significance levels: *** (p < 0.01); ** (p < 0.05); * (p < 0.1).
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Titre Table VIII. Results of panel data regression
Légende Significance levels: *** (p < 0.01); ** (p < 0.05); * (p < 0.1).
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Titre Table IX. Results of the Granger causality test between financial performance and social performance
Légende ↛: sense of non-causality
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Titre Table X. Test of the mediating effect of the social performance according to the approach of Preacher and Hayes (2008)6
Légende Significance levels: *** (p < 0.01); ** (p < 0.05); * (p < 0.1).
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Titre Table XI. Results of the Granger causality test between the integration of CSR criteria into CEO compensation and social performance
Légende ↛: sense of non-causality
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Laurence GODARD et Souhir KHEMIR, « Integration of CSR into CEOs’ compensation: effects on social and financial performance of French listed firms »Finance Contrôle Stratégie [En ligne], 26-2 | 2023, mis en ligne le 01 juin 2023, consulté le 10 décembre 2025. URL : http://journals.openedition.org/fcs/10966 ; DOI : https://doi.org/10.4000/fcs.10966

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Auteurs

Laurence GODARD

Professeur des Universités

Université de Franche-Comté

CREGO - UFC (EA 7317)

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Souhir KHEMIR

Maître de conférences

Université de Haute-Alsace

CREGO - UHA (EA 7317)

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