Discussion paper
DP18909 Executive Compensation with Social and Environmental Performance
How to incentivize a manager to create value and be socially responsible? A manager can predict how his decisions will affect measures of social performance, and will therefore game an incentive system that relies on these measures. Still, we show that the compensation contract uses measures of social performance when the level of corporate social responsibility preferred by the board exceeds the one that maximizes the stock price. Thus, explicit social incentives and socially responsible investors are substitutes. Relying on multiple measures based on different methodologies can mitigate inefficiencies due to gaming, i.e. harmonization of social performance measurement can backfire.
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