Relating CEO Compensation to Social Performance and Financial Performance: Does the Measure of Compensation Matter?

Remuneration to executives has risen sharply, even during the recent economic decline and financial crisis, giving rise to public outcries and harsh criticism. At the same time, there has been a shift toward more performance‐based remuneration, which is generally awarded over the long term. Coincident with these observations is an evolving literature aimed at studying executive pay and its determinants to learn if a pay‐for‐performance link exists. Although most studies focus on corporate financial performance (CFP) as a compensation determinant, which is based on shareholder theory, others broaden performance to include activities linked to corporate social responsibility (CSR), which relies on stakeholder theory. In this latter case, a nexus is identified between the pay‐for‐performance relationship and that between CFP and corporate social performance (CSP). In this research, we use a system of equations to form this connection and examine the influence of short‐term versus long‐term compensation measures on the resulting interrelationships.