The Effects of Pay Gap and Tournament Incentives on the Quality of Corporate Social Responsibility Reporting

Abstract

In recent years, there has been a notable surge in societal awareness, prompting increased scrutiny of corporate responsibilities and their implications for society and the environment. This heightened awareness has spurred extensive research into Corporate Social Responsibility (CSR) practices. Notably, CSR reporting is seen as a pivotal communication tool, facilitating the transmission of a firm's CSR strategy, performance, and achievements to both internal and external stakeholders. It has consequently attracted growing interest within the research domain. Although existing studies have extensively examined the outcomes of CSR reporting, there is limited understanding of the underlying determinants of this non-financial disclosure (Chen et al., 2023; Huang and Watson, 2015).
This thesis aims to delve into the factors influencing the quality of CSR disclosures with a specific focus on managerial incentives. Through three empirical studies, I will examine the impact of managerial incentives related to the (i) management-employee pay gap, (ii) internal tournament dynamics, and (iii) considerations for political promotion on CSR reporting quality within the distinctive Chinese business context. Moreover, leveraging the diversity of the Chinese institutional environment, I will further investigate whether these relationships are contingent upon various formal and informal institutions.
In the first empirical study, I explore the impact of the management-employee pay gap on firms’ CSR reporting quality. The widening disparity in compensation between executives and rank-and-file employees has drawn significant attention due to its perceived potential to attract talent and motivate managers to work harder. However, it also raises concerns about unfairness (e.g., Mueller, Ouimet and Simintzi, 2017; Rouen, 2020). Working within the unique context of China, where the pay gap is a sensitive issue and the importance of CSR reporting is on the rise, I find that the management-employee pay gap positively affects the quality of CSR reporting. In addition, this relationship is influenced by the pressure related to the pay gap. The findings suggest that the management-employee pay gap motivates managers to disclose higher-quality CSR reports, especially when faced with increased internal or external pressure.
In the second empirical study, I shift my focus to the pay gap between the Chief Executive Officer (CEO) and non-CEO executives, which serves as a proxy for tournament incentives within the top management team (TMT). Previous literature has extensively documented the significance of CEO motivations and characteristics in shaping CSR reporting (Chen et al., 2023; Lewis, Walls and Dowell, 2014). However, there has been limited research examining the role of other TMT members. Responding to the calls for increased exploration of the roles of other TMT members in accounting research (Hanlon, Yeung and Zuo, 2022), I examine the impact of senior managers’ tournament incentives on CSR reporting. The findings indicate that non-CEO managers’ tournament incentives serve as a motivator for them to improve the quality of CSR reporting. Furthermore, this positive influence is amplified when firms confront increased social and political pressure related to CSR reporting. However, this relationship weakens when participants exhibit lower endorsement for promotion or when the tournament probability is limited. Overall, the findings shed light on the motivating effect of tournament incentives on the quality of non-financial disclosures.
In the third empirical study, I focus on the influence of external tournament motivation—specifically, political promotion incentives. This study is situated in a distinctive context involving Chinese local state-owned enterprises (SOEs), where CSR and its reporting play a crucial role in evaluating the performance of top managers. I manually collected data on political promotions for CEOs and chairpersons of local Chinese SOEs. The findings of this study unveil a positive association between the motivation for political promotion and the quality of CSR reporting. Furthermore, this relationship becomes more pronounced when top SOE managers are faced with poor financial performance or are subject to heightened regional CSR pressure.
To sum up, the findings of this thesis advance our understanding of the impact of managerial incentives on elevating CSR reporting quality. This thesis contributes to both CSR reporting literature and corporate governance literature by underscoring the pivotal role managers play in non-financial disclosures. It also provides practical implications for managers, boards of directors, and regulators in China, as well as in other countries concerned with CSR reporting, pay gaps, and tournament incentives.