69 urn:lsid:arphahub.com:pub:8D21F818-6EEF-540F-91C7-D50E3E5A13E0 Maandblad voor Accountancy en Bedrijfseconomie MAB 0924-6304 2543-1684 Amsterdam University Press 10.5117/mab.99.132135 132135 MAB-scriptieprijs Corporate governance (Corporate governance) Management accounting (Management accounting) Power and pay: The moderating role of CSR contracting in CEO compensation Siegmund Daniël dsiegmund33@gmail.com https://orcid.org/0009-0009-2542-6124 1 Afridi Adnan https://orcid.org/0000-0002-8122-3710 1 University of Groningen, Groningen, Netherlands University of Groningen Groningen Netherlands

Corresponding author: Daniël Siegmund (dsiegmund33@gmail.com).

Academic editor: Marcel van Rinsum

 2025 08 12 2025 99 6 339 351 A3E28653-E7DD-5886-9B1E-A469AA20FD33 17876839 20 07 2024 03 07 2025 Daniël Siegmund, Adnan Afridi This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.

We empirically investigate the effect of CEO power on CEO compensation. Additionally, we examine the moderating role of Corporate Social Responsibility (CSR) contracting on the relationship between CEO power and CEO compensation. Analyzing 3,629 firm-year observations, we find that there is a statistically significant relationship between CEO power and CEO compensation. While we do not find significant results for the moderating role of CSR contracting on the relationship between CEO power and total compensation, our additional analyses show that when firms integrate CSR criteria in CEO compensation contracts, CEOs with higher power can extract higher non-performance based compensation.

 CEO compensation CEO power Corporate Social Responsibility (CSR) Relevance to practice

This article provides evidence that CEOs with power can exploit their influence to secure higher compensation. While CSR contracting can be promising, this study shows that it may not be effective in mitigating CEO power imbalances. Therefore, firms aiming to use CSR contracting should complement it with robust performance evaluation frameworks and stronger oversight mechanisms to ensure alignment with firm goals.

 1. Introduction

Compensation contracts can serve as a mechanism to align the interests of chief executive officers (CEOs) with those of their shareholders. These contracts can be instrumental in shaping the behaviors and attention of CEOs. Nevertheless, CEO compensation, particularly its structure and level, remains a highly debated topic. The rapid rise in CEO compensation over the past decades has prompted significant scrutiny, raising questions about the fairness and transparency of the pay-setting process. One potential explanation for the significant increase in CEO compensation lies in the growing complexity of running large organizations and the scope of the CEO’s responsibilities. From this perspective, compensation reflects the expanded scope and responsibilities of the CEO role, which to some extent can justify higher compensation. However, some critics argue that an increase in compensation levels is not always tied to actual performance increases. Instead, they could reflect what is known as rent extraction – a situation where CEOs use their influence and position to secure higher compensation for themselves, even when it may not be deserved or aligned with company performance (McChesney 1987). For instance, powerful CEOs are more likely to shape or influence the pay-setting process in their favor (Shin 2016) and can extract higher compensation. This highlights the need for further research to enhance the understanding of the relationship between CEO power and CEO compensation.

Prior research documents that CEO power influences the design of compensation contracts (Abernethy et al. 2015; Bebchuk and Fried 2003), the use of relative performance evaluation (Dikolli et al. 2018), affecting target setting, and target ratcheting (Deore et al. 2023). CEO power can be associated with shifting the emphasis toward performance measures that reflect more favorable outcomes, thereby resulting in higher compensation (Morse et al. 2011). These practices allow powerful CEOs to extract higher compensation even in the absence of induced performance. To hinder such rent extraction, firms can implement monitoring mechanisms that improve transparency and provide better oversight of CEOs actions (McChesney 1987). One increasingly used mechanism is to link CEO compensation to performance criteria based on corporate social responsibility (CSR), commonly known as CSR contracting (Flammer et al. 2019). CSR contracting increases the informativeness of compensation contracts by making the actions of CEOs more visible to boards and stakeholders (Flammer et al. 2019).

This additional layer of accountability can make it harder for powerful CEOs to justify increases in compensation, while encouraging actions that are aligned with broader stakeholder interests. Furthermore, CSR contracting can shift the CEO’s focus from financial goals to broader non-financial goals and encourage more responsible behavior. CSR contracts are intended to promote long-term focus (Tsang et al. 2021) and prevent opportunistic behaviors (Ehsan et al. 2018; Ibrahim et al. 2011).

Despite their intended role as a governance mechanism to increase oversight, it is important to acknowledge that CSR contracts may serve as a channel through which CEOs can extract rents by enforcing their influence. This has the potential to ultimately undermine the governance oversight it was intended to enhance. This phenomenon is likely to be more relevant in the context of powerful CEOs, who can leverage their influence over CSR investments (Barnea and Rubin 2010), pay-setting process (Armstrong et al. 2010) and the design of compensation contracts (Abernethy et al. 2015). Consequently, these CEOs can extract rents for their personal gain. The susceptibility of CSR contracting to such influence stems from the notion that CSR criteria are often less standardized, and more difficult to define, measure, and verify than traditional financial metrics (Hawn and Ioannou 2016). In this context, CSR targets can be easily managed or interpreted to meet targeted goals, potentially enabling a CEO with power to receive higher compensation without necessarily improving underlying performance.1 This can be particularly evident when CEOs can exert greater influence over the design of their compensation contracts by shifting the emphasis towards less challenging goals (e.g., Abernethy et al. 2015; Van Essen et al. 2015 and performance metrics on which the company historically performed well (e.g., Morse et al. 2011), thereby extracting higher compensation.

In this vein, the inherent limitation of CSR criteria coupled with the potential influence of CEOs on the design of compensation contracts, provides a rationale for examining the moderating role of CSR contracting on the relationship between CEO power and compensation. While CSR pay components are intended to enhance oversight, constrain rent extraction, and promote responsible behavior, in practice, their effectiveness may be contingent on CEO power. Powerful CEOs can shape CSR goals in ways that seemingly justify higher compensation, which weakens the intended governance functions of CSR contracting. Additionally, CEOs may present CSR goals as complex and uncertain thereby demanding more secure forms of compensation instead, such as a salary increase.

To further enhance the understanding of the interplay between CEO power, increasing compensation levels, and the use of CSR contracting, this study examines the direct association between CEO power and the level of CEO compensation, and the moderating role of CSR contracting in this relationship. We draw upon a sample of S&P 500 firms from the years 2010 to 2019, and find significant evidence to support the hypothesis that CEO power is associated with higher levels of compensation. Nevertheless, we find no significant evidence for the hypothesis that CSR contracting moderates the relationship between CEO power and CEO total compensation levels. We analyze non-performance based compensation separately to explore whether powerful CEOs secure more predictable compensation to hedge against the increased uncertainty of CSR-linked performance pay. These additional analyses show that CEOs with higher power can obtain higher non-performance based compensation (measured as the salary of the CEO). Additionally, we find that CSR contracting can strengthen the positive relationship between CEO power and non-performance based compensation. Overall, the results demonstrate that powerful CEOs extract higher total compensation, including a greater share of non-performance based pay, highlighting their influence over the process. Thus, CSR contracting can offer additional opportunities for CEOs with higher power to secure higher non-performance based compensation.

Our study makes two important contributions to the existing literature. First, it contributes to the existing body of literature that identifies a positive relationship between CEO power and compensation (e.g., Abernethy et al. 2015; Bebchuk and Fried 2003; Main et al. 1995; Zhu et al. 2021). The results show that CEO power is associated with higher total compensation. These findings align with the theoretical argumentation stemming from managerial power theory, which posits that powerful CEOs can extract additional personal benefits. The results suggest that CEOs can leverage their positions to influence compensation structures, potentially challenging the effectiveness of governance mechanisms intended to align pay with performance.

Second, we add to the literature on CSR contracting (Flammer et al. 2019; Ikram et al. 2019; Qin and Yang 2022; Tsang et al. 2021). Previous studies show that CSR contracting can increase the informativeness of compensation contracts by providing additional information on the actions of CEOs. CSR goals promote more responsible behavior and can hinder rent extracting behavior. However, due to limitations, CSR contracting can create incentives for rent extraction. Our results suggest that CEOs with higher power can use their influence to extract higher non-performance based compensation when CSR goals are integrated into their compensation contracts. Moreover, this study provides a nuanced understanding that CSR measures can serve as a mechanism used by CEOs for personal financial gains. This is especially relevant because we find that the direct effect of CSR contracting on CEO non-performance based compensation is negative, but when the CEO is deemed powerful, he/she is able to turn this effect around and induce personal compensation.

 2. Literature review and hypotheses 2.1. Literature

The intricate balance in negotiating and setting compensation has been relevant ever since the emergence of modern organizational structures (Bebchuk and Fried 2003). These instruments can be used to align the interests of CEOs with those of shareholders (Jensen and Meckling 1976). However, from the perspective of managerial power theory, CEOs with higher power have more bargaining power over the board, and use their influence to extract compensation that serves their personal interests (Bebchuk and Fried 2003). More specifically, by leveraging their position, CEOs with higher power influence the pay-setting process to their own advantage (Bertrand 2009).

CEOs with higher power are able to exert their influence over the strategic direction and decision-making processes of the firm (Haynes et al. 2019), including those pertaining to the design of compensation contracts (Abernethy et al. 2015; Bebchuk et al. 2002; Elhagrasey et al. 1998) and the pay-setting process (Bebchuk and Fried 2003; Bebchuk and Fried 2004; Van Essen et al. 2015). Specifically, CEOs can use their influence to ensure the integration of performance measures that are easier to achieve (Ittner et al. 1997), or more favorable in demonstrating success (Morse et al. 2011). Furthermore, CEOs can leverage their influence over equity-based compensation, exercising their power to inflate stock prices and maximize the value of their granted stock options (Martin and Wiseman 2016). This is accomplished by excessive risk-taking to enhance financial performance in the short-term, where CEOs profit from their vested stock awards (Pathan 2009; Pour et al. 2023).

To curb excessive CEO power, firms may implement mechanisms specifically designed to mitigate CEO power. One potential mechanism for achieving this is the integration of CSR measures into CEO compensation contracts. The integration of CSR criteria into these contracts can provide additional information on the actions of the CEO (Schiehll and Bellavance 2009). This can increase the transparency and enable more effective oversight by board members and other stakeholders (Bushman et al. 1996). Inclusion of CSR goals in CEO compensation contracts increases the visibility of CEOs’ actions and behaviors such as making it easier to oversee and track performance. Furthermore, the implementation of these criteria aligns interests with the broader stakeholder groups (Aresu et al. 2022; Tsang et al. 2021). Thus enabling firms to shift the CEO’s focus from short-term financial outcomes to broader non-financial goals, thereby facilitating long-term value creation (Flammer et al. 2019; Husted and Allen 2007). Moreover, CSR contracting links CEO compensation to non-financial outcomes that provide a holistic view of CEO actions. In this way, it broadens the performance measurement framework beyond traditional financial measures and reduces the incentives for managerial opportunisms such as engaging in earnings management for wealth maximization (Ehsan et al. 2018; Ibrahim et al. 2011). Overall, CSR contracting can hinder the adverse influence of CEO power by increasing transparency, accountability of CEO actions to multiple stakeholders and linking compensation to a broader set of goals.

While the integration of CSR criteria into CEO contract design has its benefits, inherent limitations in CSR contracting leave space for managerial opportunism. Bebchuk and Tallarita (2022) identify two main issues for CSR contracting. Firstly, CSR metrics tend to focus on narrow dimensions of a subset of relevant stakeholders. The economics of multi-tasking indicate that incentivizing executives to improve performance on narrow measures can shift focus away from other necessary aspects of stakeholder value creation. Secondly, shareholders are unable to assess whether CSR metrics provide beneficial incentives or largely operate to provide executives with additional performance-insensitive payoffs, resulting in less oversight. These practices can thus have limitations in mitigating the agency problems of CEO compensation, and the presence of powerful CEOs further exacerbates this issue.

In fact, CEOs that are more powerful tend to drastically reduce their investments in CSR activities (Asgary et al. 2016; Zhao 2017). As the CEO’s power increases further, they become more entrenched (Cespa and Cestone 2007), reduce CSR disclosure (Rashid et al. 2020) and are less inclined to commit to CSR investments that increase stakeholder satisfaction (Jiraporn and Chintrakarn 2013). One potential explanation is the short-term focus of managerial decision-making, which stands in contrast to the long-term focus of CSR contracting (Deckop et al. 2006). Furthermore, powerful CEOs are likely to deprioritize CSR goals, since the outcomes of corporate social performance can typically unfold over a longer period (Le Breton-Miller and Miller 2006). As a result, stakeholders may be misled by inflated short-term financial performance, which can obscure the longer-term risks or costs associated with deprioritized CSR efforts – particularly when CSR contracts are not structured in the stakeholders’ favor.

Ultimately, when CEOs hold substantial power, they can shape CSR contracts to align with their own goals. CEOs often direct resources toward initiatives that enhance personal preferences while minimizing accountability and costs by emphasizing symbolic or low-cost CSR activities. Overall, the literature consistently indicates that powerful CEOs exert influence over the design and implementation of their compensation structure. This ability to shape compensation structures in their favor raises concerns about the effectiveness of internal governance mechanisms and highlights the potential for rent extraction. This underscores the need to improve our understanding of how to regulate and mitigate CEO power in compensation decisions in order to prevent excessive rent extraction.

 2.2. Hypotheses development <italic>2.2.1. Chief Executive Officer power and compensation</italic>

Prior research documents that powerful CEOs influence various aspects of compensation contract design. For instance, the use of relative performance evaluation (Dikolli et al. 2018), target setting and ratcheting (Deore et al. 2023), and the emphasis on better-performing performance measures may contribute to higher levels of CEO compensation (Morse et al. 2011).

One potential mechanism through which CEOs influence compensation outcomes is by shaping board composition that can affect board room dynamics and influence decision-making (Fiegener et al. 2000). Powerful CEOs can exert influence over board members’ appointments that may undermine board independence (Westphal and Zajac 1995). This in turn reduces board efficacy (Boyd 1994) and the ability to effectively oversee pay-setting decisions, thereby increases the potential for rent extractions (Bebchuk et al. 2002). Furthermore, the dynamics of in-group mechanisms between CEOs and board members can strongly shape board-level decision-making, as the presence of friendships, loyalty, and collegiality often discourages board members from challenging the CEO (O’Reilly and Main 2010; Van Essen et al. 2015).

Overall, these structural and relational dynamics can reduce the board’s effectiveness, creating an environment that fosters rent extraction.2 In this paper, we posit that CEOs with high power possess unique bargaining positions, enabling them to negotiate compensation agreements more effectively in their favor. Agency theory highlights inefficiencies such as information asymmetries and agency problems, which further exacerbate these dynamics. This situation allows CEOs to leverage their power to align compensation structures with their personal interests, often at the expense of shareholder value and oversight. This leads to the first hypothesis.

H1: CEO power positively influences CEO compensation.

 <italic>2.2.2. Chief Executive Officer power, compensation, and <abbrev xlink:title="Corporate Social Responsibility" id="ABBRID0EBMAC">CSR</abbrev></italic>

A strand of literature documents that incorporating both financial- and non-financial information enhances the effectiveness of compensation contract design by providing a holistic view of the CEO’s actions (e.g., Davila 2000; Hillman and Keim 2001; Schiehll and Bellavance 2009). This approach reflects the expectation that firms are aligning their objectives with the interests of both shareholders and a wider group of stakeholders. Using the combination of financial- and non-financial performance measurement systems, such as CSR contracting, can improve the informativeness of performance evaluation, aid monitoring, and aids the board of directors in advising on managerial decisions (e.g., Amir and Lev 1996; Bushman et al. 1996; Schiehll and Bellavance 2009). The broadening of performance metrics through the implementation of CSR contracting provides the board of directors with additional information to assess the CEO’s actions and advise on strategic decisions. This, in turn, serves to enhance oversight and potentially constrain managerial opportunism.

However, even when compensation is linked to CSR criteria, powerful CEOs may still prioritize their personal interests, and extract higher compensation that is not necessarily justified by firm performance. In doing so, powerful CEOs disregard various stakeholder considerations (and undermine the effectiveness of CSR contracting as a governance mechanism Muttakin et al. 2018). This is because CEO power can embed self-interest behaviors into firm decision-making (Weisbach 1988). Furthermore, powerful executives have more opportunities to influence compensation structures by selecting easy-to-achieve targets or emphasizing performance measures that benefit only themselves at the expense of stakeholders. At the same time, CSR targets are not governed by accounting regulation and can be difficult to measure and verify (Simnett et al. 2009), and are relatively easier to influence. Thus, enabling CEOs to extract higher compensation. Moreover, assessing CSR-related accomplishments often relies on subjective judgment rather than objective, quantifiable outcomes (Holmstrom and Milgrom 1991). This subjectivity creates further informational advantages for powerful CEOs, allowing CEOs to use their influence and negotiate an advantageous compensation arrangement, potentially leading to unjustified remuneration (Bebchuk and Fried 2003; Wechsler-Linden and Lenzner 1995).

While prior studies have extensively examined the direct relationship between CSR and CEO compensation, our interest lies particularly in the influence of CSR contracting on the relationship between CEO power and CEO compensation (e.g., Cai et al. 2011; Hong et al. 2018; Li et al. 2016; Jian and Lee 2015; Rekker et al. 2014; Van Essen et al. 2015). In this paper, we posit that CEOs are able to influence the terms of their contracts due to their power resulting from superior firm-specific knowledge and strategic advantages. The implementation of CSR criteria into the compensation package provides an opportunity for powerful CEOs to use their knowledge and exert influence on CSR goals, thereby creating opportunities for rent extraction. In this vein, we argue that CSR contracting, while intended to align CEO interests with broader stakeholder interests, may also provide an avenue for powerful CEOs to extract higher compensation. This leads to the second hypothesis.

H2: Corporate social responsibility contracting strengthens the positive effect CEO power has on CEO compensation.

 3. Research design 3.1. Sample construction

To test our hypotheses, we rely on publicly available data for S&P 500 non-financial firms from 2010 to 2019, which leaves us with 4.262 firm-year observations excluding firms that operate in the financial sector (SIC 6000-6799). First, we use ExecuComp to provide information about CEO compensation and CEO characteristics. Second, we use Thomson/Refinitiv Datastream to collect information on CSR contracting. Finally, we use BoardEx to collect information on board characteristics. After merging data from all three sources, we have 3.629 firm-year observations left for our final sample.

 3.2. Variable descriptions <italic>3.2.1. Dependent variable</italic>

The dependent variable in this study is Total Compensation. We use ExecuComp to collect data on total compensation (TDC1), which is the sum of salary, bonus, other annual compensation, and total value of restricted stocks granted that year. As outlined by Brick et al. (2006), we measure Total Compensation as the natural logarithm of TDC1. For all variable descriptions and CEO power see Table 1 and Table 2 respectively.

Variables.

Description Measurement Source
CEO Compensation Natural logarithm of total annual CEO compensation BoardEx: Total Direct Comp (TDC1)
CEO Power Construct of CEO power (0-7) See Table 2
CSR Contracting “1” if executive compensation is linked to CSR performance, otherwise “0” Thomson/Refinitiv Datastream: Compensation policy (CGCPO09V)
Board Size Natural logarithm of total number of board members (Yermack 1996) Thomson/Refinitiv Datastream: Board structure (CGBSDP060)
Compensation Committee “1” if the firm has a compensation committee, otherwise “0” (Conyon and He 2004) Thomson/Refinitiv Datastream: Board structure (CGCPD005)
Firm Size Natural logarithm of total assets (Aresu et al. 2022) Thomson/Refinitiv Datastream: Total Assets (WC02999)
Board Independence Percentage of independent board members (Ikram et al. 2019) Thomson/Refinitiv Datastream Board functions (CGBSO07V)
Firm Leverage Ratio of a firm’s total debt over total assets (Ikram et al. 2019) Thomson/Refinitiv Datastream: Leverage (WC08221)
Firm performance (ROA) Ratio of a firm’s net income over total assets (Ikram et al. 2019) Thomson/Refinitiv Datastream: Return on assets (WC08326)
Tobin’s Q Market value of equity plus book value preferred stock and debt divided by book value of total assets (Ikram et al. 2019) Thomson/Refinitiv Datastream: Tobin’s Q (168E)

CEO Power Index.

Type Description Measurement Source
Structural CEO Duality “1” if the CEO is also the chairman of the board, otherwise “0” Thomson/Refinitiv Datastream: Board Structure (CGBSO09V)
Structural Relative Compensation The ratio of CEO compensation over top management team (TMT) compensation Thomson/Refinitiv Datastream: Compensation policy (CGCPDP011)
Ownership Beneficial Ownership Percentage of shares held by the CEO Boardex: ValTotEqHeld
Ownership Founder “1” if the CEO is also the (co)founder of the firm, otherwise “0” Boardex: Annual title
Expert CEO Tenure Number of years the CEO has been in this position BoardEx: Date Became CEO
Prestige Corporate Board-Memberships Total number of corporate boards the CEO has been on Boardex: TotNoLstdBrd
Prestige Unlisted Board-Memberships Total number of non-listed boards the CEO has been on BoardEx: TotNoUnLstdBrd
<italic>3.2.2. Independent variable</italic>

The independent variable in this study is CEO Power. In line with Finkelstein (1992) and Lisic et al. (2016), we rely on four dimensions to measure power.

Following Lisic et al. (2016), we use CEO Duality and Relative Compensation to measure structural power. CEO Duality takes the value 1 if the CEO holds the dual role of CEO and Chairperson, and 0 otherwise. Relative Compensation is measured as the ratio of total CEO compensation to top executives’ compensation. Additionally, ownership power is measured by Founder and Beneficial Ownership. Founder is a binary variable that takes the value 1 if the CEO is the founder of the firm, otherwise 0. Beneficial Ownership is measured as the percentage of shares owned by the CEO. Expertise is measured by CEO Tenure, measured as the number of years the CEO has been in office. Finally, we use the number of corporate boards and non-profit boards the CEO has served on to measure prestige power (for detailed descriptions see Table 2: CEO power Index). Following Finkelstein (1992) and Lisic et al. (2016), CEO Power is the sum of the seven variables mentioned above. We first convert all continuous variables into dichotomous variables. For each variable, we compute the industry-year median and assign a value of 1 if the observation exceeds this median, and 0 otherwise. These binary indicators are then summed to construct the CEO Power index, which ranges from 0 to 7.

 <italic>3.2.3. Moderating variable</italic>

The moderating variable in this study is CSR Contracting. Based on Aresu et al. (2022), CSR Contracting is a dummy that takes the value 1 (0) if firms (do not) use CSR contracting.

 <italic>3.2.4. Control variables</italic>

We control for several firm-level and board-level characteristics that could affect CEO Compensation. The firm-level characteristics include Firm Size, Leverage, ROA, and Tobin’s Q. The board-level characteristics include Board Size, Board Independence, and Compensation Committee. Definitions for all control variables are provided in Table 1: Variables. Finally, we control for the year and industry fixed effects in our model, by including year and industry dummies, respectively. All continuous variables are winsorized at the 1st and 99th percentiles.

 3.3. Regression model

To test whether CEO power is associated with higher compensation (H1), we use an ordinary least squares (OLS) regression model.

Compensation = β0 + β1 CEO Power + ∑ βk Controls +Year and Industry dummies + ε (1)

Furthermore, in H2, we examine the influence of CSR contracting on the association between CEO power and compensation. To test H2, we use the following equation:

Compensation = β0 + β1 CEO Power + β2CSR Contracting + β3 CEO Power * CSR Contracting + ∑ βk Controls +Year and Industry dummies + ε (2)

 4. Results 4.1. Descriptive statistics

Table 3Panel A shows the distribution of observations by years. Overall, the sample is mostly evenly distributed throughout the sample period. Table 3Panel B shows the distribution of observations by industry. In our sample, the highest number of observations is in Business Equipment (21.49 percent), followed by Other (Mines, Construction, Hotels, etc.) (15.85 percent), while Consumer Durables represent the lowest number of observations (2.45 percent).

Summary statistics: distribution of firms by industry and year.

Panel A: Distribution of years
Year Frequency Percentage
2010 342 9.42
2011 343 9.43
2012 344 9.44
2013 345 9.45
2014 346 9.46
2015 347 9.47
2016 348 9.48
2017 349 9.49
2018 350 9.50
2019 351 9.51
Total 3629 100.00%
Panel B: Distribution of industries
Industry Frequency Percentage
Consumer non-durables 293 8.07
Consumer durables 89 2.45
Manufacturing 475 13.09
Oil, coal, and gas extraction 183 5.04
Business equipment 780 21.49
Telephone and television transmission 105 2.89
Wholesale, retail, and some services 424 11.68
Healthcare, medical equipment, and drugs 397 10.94
Utilities 308 8.50
Other (Mines, Construction, Hotels, etc.) 575 15.85
Total 3629 100.00%

Table 4 provides an overview of the descriptive statistics, detailing the mean, median, standard deviation, minimum, and maximum of all variables used in the regression (N = 3629). Total Compensation has a mean of 3.527, indicating that, in our sample, the average total CEO compensation is about $7.3 million U.S. dollars. The independent variable, CEO Power has a mean of 3.417. Interestingly, in our sample we see that firms using CSR contracting (mean 3.574) on average have more powerful CEOs than firms not using CSR contracting (mean 3.454). Lastly, in our sample, on average 35 percent of firms use CSR Contracting (CSR) and align with the average for the S&P500 in this period (G&A 2019).

Descriptive statistics: Difference between CSR implemented firms and non-CSR implemented firms.

Full Sample (N = 3629) CSR firms (N = 2194) NON-CSR firms (N = 1255) CSR firms – Non-CSR firms
Mean St. Dev. Min Max Mean (A) SD Mean (B) SD Difference (A-B) t-test
Total Compensation 3.527 0.681 1.236 4.547 3.615 0.645 3.511 0.690 0.104 4.322***
Non-Performance Based Compensation 6.888 0.524 2.000 8.000 7.025 0.336 6.856 0.563 0.169 9.238***
CEO Power 3.417 1.237 0 7 3.574 1.146 3.454 1.245 0.119 2.766**
CSR Contracting 0.346 0.445 0 1 — — — — — —
Structural Power 1.432 1.435 0 2 — — — — — —
Ownership Power 0.212 0.459 0 2 — — — — — —
Expertise Power 0.663 0.481 0 1 — — — — — —
Prestige Power 1.176 0.750 0 2 — — — — — —
Board Size 1.010 0.085 0.778 1.177 1.042 0.071 0.999 0.086 0.044 14.702***
Compensation Com. 0.917 0.276 0 1 0.959 0.199 0.978 0.147 -0.019 -3.174**
Firm Size 7.018 0.613 5.412 8.340 7.294 0.528 6.956 0.551 0.338 17.468***
Board independence 82.401 10.044 46.670 93.330 84.686 8.803 81.161 10.433 3.525 9.984***
Leverage 42.990 27.808 0 143.29 46.421 23.970 41.423 28.020 4.998 5.252***
ROA 8.258 7.551 -20.50 30.150 7.389 6.302 9.062 7.588 -1.673 -6.546***
Tobin’s Q 2.030 1.390 0.545 7.794 1.581 1.106 2.234 1.419 -0.653 -13.850***

Note(s): For variable definitions, see Table 1 and Table 2. This table reports the summary characteristics for all variables used in testing the hypotheses and the dimensions of CEO Power. Additionally, it provides univariate test statistics showing the means and standard deviations for CSR implemented firms and non-CSR implemented firms. Difference in mean is reported by the t-statistic. *Significance at 10% (p < 0.1) **Significance at 5% (p < 0.05) ***Significance at 1% (p < 0.01).

Table 5 reports the correlations between all the variables used in the regression. The results in Table 5 show that Total Compensation is positively correlated with CEO Power, CSR Contracting, and all the control variables except for Tobin’s Q. Even though CEO Power and Total Compensation are significantly positively correlated with CSR Contracting the size of the correlation effects are very small (0.047 & 0.074), and the likelihood of a substantial indirect effect is minimal. Concurrently, CSR Contracting is positively correlated with Board Size, Firm Size, Board Independence, and Leverage. Whereas CSR Contracting is negatively correlated with Compensation Committee, ROA, and Tobin’s Q.

Correlation matrix.

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
(1) Total Compensation 1
(2) Non-Performance Based Compensation 0.272*** 1
(3) CEO Power 0.074*** 0.138*** 1
(4) CSR Contracting 0.074*** 0.158*** 0.047*** 1
(5) Board Size 0.158*** 0.357*** 0.026 0.244*** 1
(6) Compensation Com. 0.073*** 0.138*** 0.212*** -0.054*** 0.127*** 1
(7) Firm Size 0.211*** 0.487*** 0.139*** 0.286*** 0.555*** 0.270*** 1
(8) Board Independence 0.089*** -0.034* 0.092*** 0.168*** 0.166*** -0.054*** 0.155*** 1
(9) Leverage 0.053*** 0.183*** -0.005 0.089*** 0.224*** -0.008 0.215*** 0.117*** 1
(10) ROA 0.030* 0.053*** 0.005 -0.111*** -0.033* 0.118*** -0.093** -0.037** -0.104*** 1
(11) Tobin’s Q -0.037*** -0.265*** -0.011 -0.231*** 0.229*** -0.05*** -0.439*** -0.008*** -0.09*** 0.447*** 1

Note(s): For variable definitions, see Table 1 and Table 2. This table shows the correlations between all variables used for testing hypotheses. All continuous variables are winsorized to reduce the effect of outliers. *Significance at 10% (p < 0.1) **Significance at 5% (p < 0.05) ***Significance at 1% (p < 0.01).

Overall, the patterns suggest that larger, more leveraged firms with independent boards are more likely to use CSR Contracting, possibly due to greater external pressure. In contrast, financially strong firms may feel the need to incorporate CSR contracting less. While all of the correlations are significant, they do not come near the threshold to assume multicollinearity, nor did their calculated variance inflation factors.

 4.2. Predictors of CEO compensation

Table 6 presents the results of the regressions from equation 1 and 2. The results in Table 6 Column 1 show that the coefficient of CEO Power is statistically significant and positive (β = 0.019, p < 0.05), indicating that CEO Power is positively associated with total CEO compensation. The coefficients of Board Size and Firm Size are statistically significant and positive (β = 0.428 & 0.180, p < 0.01, respectively), indicating that larger boards and firms are associated with higher CEO compensation. Moreover, the coefficients of Compensation Committee and Board Independence are statistically significant and negative (β = -0.175, -0.003, p < 0.01 & 0.05, respectively), indicating that the presence of a compensation committee and higher board independence are associated with lower CEO compensation. Moreover, the coefficient of Tobin’s Q is statistically significant and positive (β = 0.021, p < 0.01), indicating that higher market performance of the firm is associated with higher CEO total compensation. The results of Table 6 Column 2 show that the coefficient of CEO Power is statistically significant and positive (β = 0.022, p < 0.05). The coefficient of CSR Contracting is statistically significant and positive (β = 0.042, p < 0.1), indicating that CEOs receive higher compensation when their compensation is linked to CSR-based measures. Meanwhile, the results of the control variables are consistent with Column 1. Furthermore, in Table 6 Column 3, we introduce the interaction term (CEO Power * CSR Contracting), which is our main variable of interest. The results of Table 6 Column 3 show that the coefficient of CEO Power is statistically significant and positive (β = 0.024, p < 0.05). However, the coefficient of the interaction term is not statistically significant (β = -0.015, p > 0.1).

OLS Regression results.

Variables (1) (2) (3) (4)
Total Compensation Total Compensation Total Compensation Total Compensation Fixed effects
CEO Power 0.019** 0.022** 0.024** 0.045**
(0.009) (0.009) (0.011) (0.015)
CSR Contracting 0.042* 0.082 0.125
(0.025) (0.074) (0.048)
CSR * CEO Power -0.015 -0.014
(0.020) (0.023)
Board Size 0.428*** 0.410*** 0.412*** -0.121
(0.178) (0.193) (0.177) (0.257)
Compensation Com. -0.175*** -0.167*** -0.167*** -0.260***
(0.053) (0.054) (0.054) (0.096)
Firm Size 0.180*** 0.178*** 0.175*** 0.390***
(0.030) (0.030) (0.030) (0.074)
Board Independence -0.003** -0.003** -0.003** -0.000
(0.002) (0.001) (0.001) (0.002)
Leverage -0.010 -0.011 -0.010*** 0.001
(0.069) (0.069) (0.069) (0.001)
ROA 0.198 0.208 0.214 0.002
(0.200) (2.05) (0.206) (0.002)
Tobin’s Q 0.021*** 0.021*** 0.020*** 0.033*
(0.012) (0.012) (0.009) (0.018)
Constant 1.593*** 1.630*** 1.614*** 0.867
(0.336) (0.300) (0.336) (0.536)
Observations 3629 3629 3629 3629
R-squared 0.019 0.020 0.020 0.020
Industry dummies Yes Yes Yes No
Year dummies Yes Yes Yes No

Note(s): For variable definitions, see Table 1 and Table 2. The data set contains 3629 firm-year observations throughout 2010-2019 for U.S. companies listed on the S&P 500 index. Standard errors are reported in parentheses under the estimated regression coefficients. *Significance at 10% (p < 0.1) **Significance at 5% (p < 0.05) ***Significance at 1% (p < 0.01).

 4.3. Robustness analyses <italic>4.3.1 Firm fixed effects</italic>

To add to the robustness of the findings, we employ a firm fixed effects model as determined by the Hausman test. This allows us to control for the unobserved individual or group-specific variations, thereby facilitating a more comprehensive understanding of the relationships.

Table 6 Column 4 shows the fixed effects regression results for the association between CEO Power, CEO Total Compensation, and the moderating effect of CSR Contracting. Overall, the results of the fixed effects model are consistent with the results of the OLS model presented in Table 6 Column 3.

 <italic>4.3.2. Entropy balancing</italic>

The summary statistics in Table 4 show that firms using CSR contracting are statistically different from firms that do not employ CSR contracting. Since these firms differ from each other on these characteristics, they could be inherently different, and thus may differ in their choice to integrate CSR criteria in CEO compensation contracts. It is possible that our model does not account for certain unobservable characteristics. In order to address this, following Hainmueller (2012), we employ the entropy balancing technique. This matching technique allows us to adjust the weighting of the sample in a way that ensures the distribution of covariates in the reweighted sample. In this regard, we balance the difference between firms that use CSR contracting and firms that do not use CSR contracting.

Table 7 shows the summary statistics of the variables before balancing (Panel A) and after balancing (Panel B) for various firm- and board-level characteristics. The results show that after balancing, the distribution of covariates is balanced by mean and variance. The results regarding the hypotheses after entropy balancing are almost inferentially identical to the results in Table 6.

Summary statistics (entropy balancing).

Panel A: Before Sample Balancing: Without Weighting
Non- CSR firms (Treated) CSR firms (Control)
Mean Variance Skewness Mean Variance Skewness
Board Size 1.043 0.005 -0.325 1.000 0.007 -0.336
Compensation Com. 0.959 0.004 -4.605 0.978 0.022 -6.465
Firm Size 7.295 0.280 -0.015 6.957 0.302 0.106
Board Independence 84.700 76.720 -1.715 81.260 107 -1.166
Leverage 46.360 574 0.777 41.460 779 0.795
ROA 7.392 39.870 0.175 9.114 56.760 -0.312
Tobin’s Q 1.581 1.223 2.477 2.334 2.015 1.645
Panel B: After Sample Balancing: With Weighting
Non- CSR firms (Treated) CSR firms (Control)
Mean Variance Skewness Mean Variance Skewness
Board Size 1.043 0.005 -0.325 1.042 0.005 -0.325
Compensation Com. 0.959 0.004 -4.605 0.959 0.039 -4.604
Firm Size 7.295 0.280 -0.015 7.295 0.280 0.015
Board Independence 84.700 76.720 -1.715 84.70 76.72 -1.714
Leverage 46.360 574 0.777 46.36 574 0.777
ROA 7.392 39.870 0.175 7.392 39.87 0.175
Tobin’s Q 1.581 1.223 2.477 1.581 1.223 2.478

Note(s): For variable definitions, see Table 1 and Table 2. This table reports the mean, variance, and skewness of CSR firms and non-CSR firms. Panel A shows before entropy balancing and Panel B shows post-entropy balancing at target level two for the various variables and characteristics listed in the table.

 4.4. Additional analysis <italic>4.4.1. Alternate dependent variable</italic>

Next, we examine the effects on non-performance based compensation, also known as salary. Generally, CEO compensation consists of five components, salary, annual bonus, long-term incentive plans, restricted option grants, and restricted stock grants. Traditionally, performance based compensation constitutes the major part of total compensation and is intended to align the interests of CEOs with those of shareholders. However, increasing regulatory and governance oversight – such as the inclusion of CSR contracting – can increase the complexity and uncertainty regarding the performance-based components of total compensation. This can also have consequences for the potential compensation outcomes, specifically for powerful CEOs who may perceive the performance component as being largely constrained by oversight. In this context, from the CEO’s perspective, the governance mechanisms can lower the value of rent extraction through performance based-compensation. We argue that CEOs recognize this growing uncertainty and, in response, may seek to shift their compensation structure toward non-performance based compensation such as salary, which is more stable and predictable. Non-performance compensation is measured as the natural logarithm of CEO salary, extracted from the ExecuComp database, and set at a minimum of (log) 2 and maximum of (log) 8 to remove extreme outliers. The results in Table 8 Column 1 show that the coefficient of CEO Power is positive and significant (β = 0.031, p < 0.01), indicating that CEOs with higher power can extract higher non-performance based compensation. Table 8 Column 3 shows that the interaction term has a significant and positive coefficient (β = 0.057, p < 0.01), indicating that CSR contracting strengthens the positive relationship between CEO power and non-performance compensation. The control variable results are largely consistent with those in Table 6.

OLS Regression results.

Variables (1) (2) (3) (4)
Non-Performance Based Compensation Non-Performance Based Compensation Non-Performance Based Compensation Non-Performance Based Compensation Fixed effects
CEO Power 0.031*** 0.031** 0.013** 0.051***
(0.007) (0.008) (0.007) (0.005)
CSR Contracting 0.010 -0.193*** -0.008
(0.015) (0.048) (0.031)
CSR * CEO Power 0.057*** -0.004
(0.133) (0.008)
Board Size 0.701*** 0.699*** 0.685*** -0.008
(0.134) (0.132) (0.130) (0.091)
Compensation Com. -0.070*** -0.068*** -0.067*** -0.064*
(0.233) (0.233) (0.023) (0.034)
Firm Size 0.175*** 0.289*** 0.291*** 0.299***
(0.030) (0.025) (0.025) (0.026)
Board Independence -0.003** -0.018 -0.018** 0.002***
(0.001) (0.003) (0.003) (0.001)
Leverage -0.001 0.001*** 0.001*** 0.000
(0.000) (0.000) (0.000) (0.000)
ROA 0.012*** 0.012*** 0.012*** 0.002**
(0.002) (0.002) (0.002) (0.001)
Tobin’s Q 0.057*** 0.057*** 0.058*** 0.025***
(0.013) (0.012) (0.013) (0.007)
Constant 3.967*** 3.977*** 4.037*** 4.438***
(0.197) (0.198) (0.200) (0.007)
Observations 3629 3629 3629 3629
R-squared 0.019 0.020 0.020 0.101
Industry dummies Yes Yes Yes No
Year dummies Yes Yes Yes No

Note(s): For variable definitions, see Table 1 and Table 2. The data set contains 3629 firm-year observations throughout 2010–2019 for U.S. companies listed on the S&P 500 index. Standard errors are reported in parentheses under the estimated regression coefficients. *Significance at 10% (p < 0.1). **Significance at 5% (p < 0.05). ***Significance at 1% (p < 0.01).

Table 8 Column 4 shows the regression analysis for non-performance based compensation using a firm fixed effects model. The coefficient of the interaction term is insignificant. The regression results after entropy balancing for non-performance based compensation are consistent with the results in Table 8 Column 3. In sum, these findings suggest that CSR contracting strengthens the association between CEO power and non-performance based pay. However, the relationship does not remain statistically significant once firm-level heterogeneity is accounted for through firm-fixed effects. This indicates that time-invariant firm characteristics may drive the observed effect and call for cautious interpretation of the initial associations.

 5. Conclusion

This paper examines the association between CEO power and CEO compensation, as well as the moderating effect of CSR contracting on this relationship. We argue that CEOs with greater power can leverage their position to increase their compensation and influence CSR goals in their compensation contracts, thereby enhancing their compensation. CEOs with greater power may draw on structural dynamics, ownership stakes, expertise, and prestige to shape the outcomes of their compensation. These dimensions of power create an environment that enables CEOs to assert their influence and negotiate terms that align with their personal interests within the organization.

In light of the aforementioned, we posit and find that CEO power is associated with higher compensation. This result aligns with managerial power theory, which suggests that powerful CEOs can influence the structure of their compensation and extract rent. Furthermore, we argue that the inherent limitations of CSR contracting can exacerbate this issue and fail to prevent CEO opportunism. However, our findings indicate that the moderating effect of CSR contracting on the relationship between CEO power and total compensation is not statistically significant.

Additional analyses show that CEO power is significantly associated with higher non-performance based compensation, and that CSR contracting further strengthens this positive relationship. However, this interaction effect does not hold when using firm-fixed effects, suggesting that the observed relationship may, in part, be driven by unobserved firm-level characteristics. Therefore, while the main findings are consistent across OLS and entropy-balanced samples, it is important to exercise caution when interpreting this interaction. These results suggest that CEOs with considerable influence are likely to exert control over the governance structure, particularly regarding the compensation setting process. This allows CEOs with greater power not only to shape their total compensation but also to secure higher salaries than their counterparts. CEOs may also use CSR goals as a tool to justify higher non-performance based compensation by framing them as complex, high-stakes initiatives with an increased number of targets, which require exceptional leadership. These results offer a crucial insight by showing that while CSR contracting is associated with non-performance based compensation, its integration into compensation contracts may provide opportunities for the extraction of such compensation.

Our study has some limitations that present opportunities for future research. First, in our study we use a dichotomous variable to measure CSR contracting, which represents the integration of CSR performance measures in CEO compensation contracts. Future research could instead rely on the percentage of CSR measures integrated into CEO compensation contracts. This would provide a more nuanced understanding of whether a higher degree of CSR integration can mitigate CEO power.

Overall, we acknowledge that CEO power may influence CSR contracting in ways that undermine the governance function of CSR-linked compensation. For instance, CEO power may facilitate overcompensation through poorly designed contracts. However, investigating this potential indirect effect was not the primary focus of our study. Nonetheless, our data suggest that this concern is limited in our context. While we observe a statistically significant positive correlation between CEO power and CSR contracting (r = 0.047), the relatively small effect size indicates that any indirect influence is likely to be minimal in our sample. Nevertheless, we encourage future research to examine the relationship between CEO power and CSR contracting in different contexts or under alternative governance conditions.

D.L. Siegmund – Daniël is a self employed financial advisor working with Bosma Beste Advies, he obtained his MSc Business Administration: Management Accounting and Control from the University of Groningen, The Netherlands.

A. Afridi – Adnan is PhD in Accounting from University of Groningen, The Netherlands.

Daniël Siegmund is one of the winners of the MAB Thesis Award 2024. This article is based on his master thesis.

 Notes

Powerful CEOs have the ability to negotiate for the inclusion of more favorable CSR targets and to push for softer or more easily achievable targets.

Additionally, due to superior knowledge, CEOs can influence business activities that enhance the value of their vested stock options (Martin and Wiseman 2016) or engage in excessive risk-taking to boost financial performance in the short term (Pathan 2009; Pour et al. 2023), thereby increasing compensation.

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