Pay-for-CSR-Performance Compensation and Loan Contracting

Corporate social responsibility (CSR) refers to a firm’s responsibilities toward the community and environment in which it operates and typically includes economic, legal, ethical, and philanthropic responsibilities. In recent years, there has been an increasing trend of firms integrating CSR performance targets into executive compensation. A report by the Investor Responsibility Research Center and the Sustainable Investments Institutes states that 43% of Fortune 500 firms link their executive compensation contracts to CSR performance. Research also finds that about 50% of Standard & Poor’s 500 companies have adopted the practice of pay-for-CSR-performance (PCSR). The proposed research aims to investigate whether and how tying executive compensation to CSR targets impacts firms’ various loan contracting features. Specifically, the proposed research examines (1) whether PCSR compensation schemes affect loan interest rates; (2) whether PCSR compensation schemes affect non-price loan terms such as collateral requirements and covenants; (3) whether PCSR compensation schemes affect the structure of syndicated loans; (4) whether the effect of PCSR compensation schemes on the above loan contracting features, if any, is conditioned upon the nature of CSR-related targets included in executive compensation contracts; and (5) whether the effect of PCSR compensation schemes on the above loan contracting features, if any, is conditioned upon the previous relationships between borrowers and lenders.

The proposed research intends to contribute to the literature in two ways. First, it will contribute to CSR literature in general and to a burgeoning stream of studies on PCSR compensation schemes in particular. Given the growing interest in CSR activities and the increasing trend of integrating CSR criteria into executive compensation contracts, the proposed research can shed new light on the economic consequences of CSR-related initiatives. Besides, the proposed research adds to the literature on CSR’s impact in the debt market by examining not only the interest rate, but also non-price loan terms and syndicate structure. Second, the proposed research will provide additional insights into the effect of executive compensation on loan contracting. Previous studies linking compensation to loan contracting focus on certain compensation components (such as stock options and pensions) and accounting-based performance measures. To the best of my knowledge, the proposed research will be the first to investigate how linking executive compensation to non-financial performance measures affects bank loan contracting.