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The Rise of CSR Contracting: Is Executive Pay the Key to Improved ESG Performance?

measuring impact trends
July 24, 2018

A sustainability policy that rewards CEOs for implementing corporate social responsibility (CSR) initiatives, CSR contracting is a new type of executive compensation that’s gaining ground at America’s largest companies. And research indicates that it may improve outcomes and increase the value of companies that embrace it.

Detailing the Trend

According to a study of executive compensation and sustainability at the Kellogg School of Management at Northwestern University, by 2013, CSR contracting was being used at roughly 40% of companies in the Standard & Poor’s 500 Index, up from 12% 10 years before.

Dylan Minor, an assistant professor of managerial economics and decision sciences at Northwestern, said his researchers studied whether these companies actually implemented CSR policies or merely engaged in superficial “greenwashing.” The study found that only about half of firms that use CSR contracting are actually implementing serious ESG policy changes.

According to Minor’s research, companies using the compensation method on average:

  • Cut emissions by nearly 9%
  • Increased filings for so-called “green patents” by 3%
  • Received a 5% increase in independent CSR ratings

The study pointed out that CSR contracting incentivizes executives to sacrifice short-term profits for long-term goals that could reduce the risk of hefty fines or boycotts later on. “It seems if you contract with your top executives on different social issues, that you can actually impact the ultimate performance of the company,” Minor said.

Surprisingly, companies in emissions-intensive industries like mining, energy production, and transportation opted for CSR contracts roughly twice as often as other companies. “In those industries, it could be more tempting to take advantage of the environment,” Minor noted. “But a good number of companies are saying to their executives, ‘Hey, also pay attention to emissions.'”

Mixed Opinions

Until the Kellogg study was published, the bulk of academic research had suggested that CEOs suffer financially for implementing CSR policies, with one Australian study concluding that CEO compensation declined the more executives pushed for CSR policies. “Overall, we find that there is a negative relation between CSR and cash, salary and long-term measures of compensation,” the University of Queensland researchers wrote, specifying that “it is employee relations, the environment, and diversity that drive this negative relation with CEO compensation.”

Another study said that CEOs were more likely to lose their jobs if they pushed for CSR policies, and that their companies tended to end up worse off financially.

But it’s not all black and white. “We see this double-edged sword where if the firm is doing well, investments in corporate social responsibility can buffer a CEO from dismissal,” said Tim Hubbard, a management professor at Notre Dame. “But on the other hand, if there’s negative financial performance, it can really set the CEO up for a situation where they could likely be terminated.”

Minor’s study shows that CEOs may be able to be financially incentivized to adopt ESG policies, and that doing so may benefit both executives and their firms. As a result, he predicts that 60 to 80% of companies may adopt CSR contracts in the next decade.

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