Case Study :College Admissions Scandal

Date: 10/27/19

While both academics and practitioners have debated the role of corporations in society for

many years, the underlying question of corporate rights and responsibilities remains. The

ongoing global economic issues continue to fuel this debate, with many wondering if the

worst of the crisis wasn’t at least partly powered by the actions of the companies who ended

up suffering and asking for assistance. As governments continue to work to structure bailout

funds and temporary loans in an effort to turn around the economy, activist groups on all

sides struggle to make their voices heard. Calls for greater regulation and increased

responsibilities for corporations are regularly expressed, as are dissenting views that suggest

that the system will ultimately sort things out if left on its own.

 Coming under particular scrutiny during these debates has been the value of compensation

being received by CEOs and other top executives. Though some have been tracking and

raising concerns about the rise in executive pay for a number of years – the Institute for

Public Policy (Anderson, Cavanagh, Collins, C. Pizzigati, & Lapham 2008) highlights that

average CEO pay was typically 30-40 times the pay of an average worker 30 years ago but

now averages more than 350 times the pay of the typical worker – for most such pay was

seen as a reward so long as companies were making money and the economy was thriving.

The assumption, generally built on an agency theory foundation (Tosi et al., 2000; Murphy,

1999), is that while overall pay might be increasing, it would rise and fall to at least some

degree with the profitability of the company. With the economic crisis, however, many are

now questioning the appropriateness of the levels of compensation and even wondering if the

structure of executive compensation might encourage actions by executives that contribute to

the broader economic problems. What is more, both anecdotal and empirical work indicates

that executive pay does not, in fact, correlate much, if at all, with the fortunes of the

company.

Considered in this way, the area of executive compensation begins to intersect with

considerations of corporate social responsibility. Interestingly, though executive

compensation is one of the more studied topics within the management literature (Miles,

Evangelopoulos and Russell, 2007), there is a limited intersection with corporate social

responsibility. When the literature has overlapped, it has typically been in examining the

ethics of specific compensation schemes (e.g., stock options, Adam & Schwartz, 2009) or in

seeing whether particular responsible acts were rewarded.

Little if any work has focused on the broader question of whether socially responsible firms

will recognize the potential conflicts that come with higher levels of executive compensation

and thus, on average, limit their pay relative to what is being paid in other firms. That is,

might the socially responsible firm seek to better balance compensation across the firm and

emphasize that profit, both individual and corporate, must be earned within a system that is

fair and balanced for all? In the pages that follow, we will develop this argument further.

First, we explore the literature on executive compensation, especially its relationship to

company performance, as well as introduce the broad corporate social performance

literature. Attention then shifts to the linkage between executive compensation and corporate

social performance, culminating in the development of specific hypotheses. Measures are

described such that an analytical approach may be utilized to test the hypotheses. Finally, a

presentation of the results and discussion of the implications are offered in conjunction with

some suggestions for future research in this largely underexplored research arena.

Review and Hypotheses 

Executive compensation and corporate social performance are well-studied topic areas within

the management literature. To date, however, there has been limited work that has

incorporated both topics in a single study, particularly when examining the broader level

issues that are the focus here. As a result, we will pull from both research streams to create a

broad foundation for the current work and develop a rich logical argument linking the

disparate pieces. Executive Compensation Executive compensation has received significant

attention in both academic research and the popular business press. In both cases, the

primary focus is on the relationship between executive pay and firm performance (Tosi et al.,

2000). The general idea being, of course; are companies who pay more for executives getting

an appropriate return in profits? In the popular press, this was most famously captured in an

annual series of reports from Business Week on “Who made the most and are they worth it?”

The research literature, while couched in more academic terms, is primarily focused on this

same notion. Much of this work stems from an agency theory perspective (Jensen &

Meckling, 1976; Jensen & Murphy, 1990) and examines how executive compensation can be

structured so as to align the interests of hired executives with those of the stockholders who

are the actual owners of the company (Murphy, 1999). The concern is that executives who

are earning a large salary may be more interested in maintaining their salary than growing

the value of the company, and may make decisions that serve self rather than company

interests. Given this, research has examined whether different compensation packages,

particularly those ostensibly tied to company performance such as stock options or bonuses

based on sales or profit, lead to different actions by the CEO and/or executive team (Abowd

& Kaplan, 1999).

 While there is extensive literature on both executive compensation and corporate social

performance, the relationship between these areas has not generally been explored. The

current economic crisis and the focus it has brought to executive pay, however, suggests that

the time is ripe for such an investigation. The current study is a first step in examining this

relationship and provides some intriguing findings. On the whole, the results support the

general proposition that companies that are viewed as being good corporate social

performers will have a lower rate of executive compensation than will those who are not

rated as good corporate social performers. Said differently, those in the good CSP group are

more likely to keep executive compensation in check than are other firms. This was true for

both the highest-paid executive and for the average compensation of a top.

Management team. It was also true whether compensation was measured using the base

salary and bonus figure reported to the SEC or measured using the maximum compensation

value, a figure that took into account the highest possible value of stock options. While at

first blush, this may suggest that top management is in some way being penalized for good

corporate citizens, it is not clear that this is the case. All of the managers in the sample were

being significantly rewarded for their work, with the average level of compensation nearing

$8 million even in the more conservative computations. As noted earlier, at this level of play,

there is likely to be little if any motivation generated by additional pay. The results suggest

that managers at those companies characterized with good CSP may, in fact, be willing to

sacrifice at least a piece of financial compensation for the intangible rewards of being seen as

good corporate citizens and treating all employees fairly. Perhaps the most surprising

outcome, however, is that the results on compensation would be so consistent given the

nature of the sample. The approach for creating the comparison group identified similar size

companies from the same industries as those identified as good CSP firms, which meant that

analysis was limited to a dichotomous rather than continuous variable. What is more, it

means that the comparison group is not stacked with poor corporate social performers that

would exaggerate differences between the groups. In fact, many of the companies in the

comparison group actual appear on one of the four lists used to generate the sample of good

corporate social performers. That means that the comparison is between good CSP firms and

a general sample of other firms rather than between extremes of ‘Great Performers’ and

‘Poor Performers’. Thus, this analysis can be considered a relatively conservative test of the

relationship. As expected, the analysis examining the relationship between executive

compensation and corporate social performance with financial performance produced a

somewhat muddled picture. There was at least some evidence for a significant positive

relationship between company financial performance and executive compensation. While

there was no relationship with the total return measure, three of the four relationships

between executive compensation and return on sales were significant in a positive direction.

The relationship between corporate social performance and financial performance returned a

similar pattern of results, showing a positive relationship between CSP and performance

when the return on sales was used, but no relationship with the total return. Whether the

positive relationship with return on sales or the lack of a relationship with total return

provides a better indicator of reality is not clear. It is possible that despite efforts to link

executive compensation with shareholder outcomes, compensation measures are still

generally tied more directly to simple profit measures like ROS that executives see as more

directly within their control. As neither of these relationships was the primary focus of this

research, we are hesitant to go too far in searching for an explanation. Still, the significant

results found here for the relationship between CSP and return on sales at least give one

reason to pause. As noted in the case of compensation and corporate social performance, the

nature of the sample suggests that the current analysis provides a conservative test of the

relationship, since the comparison group was by nature not necessarily that different from

the good corporate social performers. Thus, this adds additional evidence to the ongoing

CSP/CFP debate.

Conclusion:

Future research, however, needs to extend this work into a variety of related areas. A natural

extension would be to examine the relationship between executive compensation and the

compensation of average workers within the company. While gaining access to accurate data

may be difficult, a complete picture of a company’s commitment to equitable compensation

requires looking at lower levels as well as upper levels. In fact, it is our contention that the

ratio of executive pay to average worker pay may provide a more direct measure of a firm’s

underlying belief in corporate social responsibility than other sets of actions that may reflect

temporary investments and merely be a reaction to activist pressures or an effort to “polish”

the corporate image. Future research, however, needs to extend this work into a variety of

related areas. A natural extension would be to examine the relationship between executive

compensation and the compensation of average workers within the company. While gaining

access to accurate data may be difficult, a complete picture of a company’s commitment to

equitable compensation requires looking at lower levels as well as upper levels. In fact, it is

our contention that the ratio of executive pay to average worker pay may provide a more

direct measure of a firm’s underlying belief in corporate social responsibility than other sets

of actions that may reflect temporary investments and merely be a reaction to activist

pressures or an effort to “polish” the corporate image.

References

Adam, A. & Schwartz, M. 2009. Corporate governance, ethics, and the backdating of stock options. Journal of Business Ethics, 85, 225-237.

Griffin, J. & Mahon, J. 1997. The corporate social performance and corporate financial performance debate: Twenty five years of incomparable research. Business and Society, 36,1. 5-31.

Waddock, S. & Graves, S. 1997. The corporate social performance – financial performance link. Strategic Management Journal, 18(4), pp. 303-319.