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ABSTRACT
CHAPTER 1 INTRODUCTION
1.2.1 ACADEMICS
1.2.2 CORPORATIONS
1.3 DEFINITIONS
1.3.1 COMPENSATION
2.1 INTRODUCTION
3.1 INTRODUCTION
3.2 SAMPLE
3.3 MEASUREMENT
BIBLIOGRAPHY
ABTRACT
In this paper we examine the relation between corporate socialresponsibility (CSR) and CEO
compensation as in Malaysia perspective. Both CSR and CEO compensation are disaggregated
into various sub-components. The elements that underlying on CSR are environment,
community, product and employees. While compensation is measured base on salary and
bonus. In this paper there is an additional element based on earning management included.
Out of 369 only 188 companies are selected after excluding financial companies from year
2016 until 2018. Type of sample technique that we use is simple random technique as it
removes bias from the selection procedure and should result in representative samples.
CHAPTER 1
INTRODUCTION
This paper is consist of two main issues. The first issue is to examine the relationship between corporate
social responsibility (CSR) and executive compensation. Previous literature disclosed about the relation
between executive compensation and CSR (e.g. Rekker, Benson, & Faff, 2014;Cai, Jo, & Pan, 2011;
Francoeur, Melis, Gaia, & Aresu, 2017; Sapp, 2006). In addition, the first issue also examines how
1.2.1 Academics
The findings from this research can be used to give an exposure and to educate accounting
students about the relationship between executive compensation and CSR. The impact of CSR
on executive salary, bonus or any other benefits incentives provided as well as firms
profitability. This research could be beneficial to the future researchers since there is very little
research in this area, especially from the Malaysia perspective. The study provides empirical
evidence on the relationship between executive compensation and CSR based on agency
theory. The impact of CSR on executive compensation it is either positively or negatively will
be disclosed and discussed and the study identifies the factors that contribute to the hypothesis
tested
1.2.2 Corporations
This research could provide an exposure on how will the firms’ CSR performance effect the
corporations could enhance a creative strategies, existing business practices and environmental
defined as reward that is paid to someone in exchange for service that has been done it is either
in terms of monetary or non-monetary pay. Although these two definitions are common and
general, there are few arguments defining compensation in different aspects. Pearce (2010)
ague that compensation expresses that it is some sort of structure in which the employees who
perform better are paid more than the average performing employees, executives or
shareholders. This definition clarify that employees, executives or shareholders are paid more
or paid with other benefits based on their performance contribution to the company. If their
performance lead to a raise of the company’s profit, they will be rewarded with bonus,
According to Bob (2011), compensation is not only measured based on money. It is also
someone to enhance their performance and it will automatically enhance the company’s
performance as well. Under the same circumstances, Hewitt (2009) implies that a management
that having a compensation structure in which a person who performs better is paid more as
this practice will encourage top-performers to work harder and build a positive competition
The first and earliest definition of CSR is given by Howard Bowen who is called as the father
of CSR (Carroll, 1999). According to Bowen (1953, as cited in Ahmadu, Haron, & Azlan, 2015,
p. 84) explains that “the obligations of businessmen to pursue those policies, to make those
decisions, or to follow those lines of action which are desirable in terms of the objectives and
values of our society”. Prior studies and authors defined CSR in their own way. Schwartz
(2011, p. 19), notes that “virtually all definitions of CSR include the notion that business firms
shareholders”. The current study accept this definition as it is in the line based on the agency
theory that CSR is the solution of agency problems within the firm and it is one of the reason
why firms invest in CSR to recover from any problems occur (Jensen & Meckling, 1976;
Jensen, 1986).
However, there is an argument from Horrigan (2010), explains there is no general definition of
CSR due to the high levels of being open to more than one interpretation. On the other hand,
Carroll (1979, cited in Top, 2017, p. 3), defined CSR as “corporate integrated responsibilities
encompassing the economic, legal, ethical, and discretionary (or philanthropic) expectations
that the society has of organizations”. Apparently, various definitions of CSR have been
adopted and defined by different authors, specific to their own interests and purposes. A
responsibility of organisations not only focus on fulfilling legal expectation but also being
responsible and more socialise into human capital, to the environment and relations with
involving stakeholder obligation and social obligation”. For instance, Steiner (1971, cited in
Isa, 2012, p. 329) “assumed that social responsibilities are more of an attitude, as an
organisation is helping society to achieve its basic goals”. “Thus, CSR is not only enhancing
the economy, but its movement represents a broader concern with the role of business, as well
as improving the social obligation” (Eells and Walton, 1974 cited Isa, 2012, p. 329). Other
authors defined CSR as more than profit-making (Davis, 1960; Backman, 1975) as going
beyond economic and legal requirements (McGuire, 1963); as a voluntary activity (Manne and
Wallich, 1972); as concern for the social system (Eells and Walton, 1961); and as an approach
to social responsiveness (Sethi, 1975; Ackerman and Bauer, 1976). Subsequently, in the early
days of CSR research, many scholars in this field were concerned with economic issues and
Chapter Two of this study presents the theoretical concept used in literature on relationship
between executive compensation and CSR. The chapter discusses a little bit about agency
theory and stakeholder theory that emphasized on the issue. Other relevant issues to executive
compensation, CSR and earnings management are presented as well in this chapter. Hypothesis
development will be included in this chapter. Chapter Three focuses on the methodology and
model will be elaborated more details. Chapter Four will be discussed more about the findings
presented in Chapter Five. Contributions to the research and suggestions for future study are
elaborated in this chapter as well. Additional information related to the current research, tests
LITERATURE REVIEW
2.1 Introduction
This chapter focuses on the empirical theory theoretical literature for (i) agency theory and (ii)
stakeholder theory. The purpose for this study is to issue evidence and develop a disclosure on
the impact of Corporate Social Responsibility (CSR) on Executive Compensation that has done
in previous research as well as to contemplate the differences between previous research and
this study. In addition, there is a purpose to see whether firms that are more socially responsible
pay their CEOs less, as there is few studies investigated on how the US firms’ CSR has affected
CEO compensation. This CSR-compensation issue has occurred an additional light on the issue
of how CSR of firms behave differently from socially irresponsible firms in determining their
executive compensation.
Jensen and Meckling (1976) introduced a classic agency theory, which they argue that
CEOs prefer to persue their own interest rather than maximize shareholders’ wealth. For
example, Hemingway & Maclagan, (2004) argue that those CEOs that trying to hide their
wrongdoing, incline to invest in CSR to cover up the fraud they done. “Hence, given the
the relative importance of agency and stakeholder theories regarding the causal impact of CSR
Basically, Jenson and Meckling, (1976) hold the view that agency theory involved between the
relation of managers and stakeholders. According to Ross (1973), manager acts as an agent
relationship has arisen between two (or more) parties when one, designated as the agent, acts
for, on behalf of, or as representative for the other, designated the principal, in a particular
which at the same time give benefits to the implementation of internal projects or return to
shareholders. There is a view from Friedman (1970) mention on agency theory in his criticism
of CSR, explaining that managers as the agents of an organisation are responsible to increase
and maximize company’s profits as well as stakeholders’ wealth, however, spending money on
the community. There is a statement from Friedman said, "There is one and only one social
responsibility of business - to use its resources and engage in activities designed to increase its
profits so long as it stays within the rules of the game, which is to say, engages in open and
Berle and Means (1933, p.139) observe, “directors, while in office, have almost complete
managers in a corporation if ownership and management are separated. Jensen and Meckling
(1976) believe that, in the world of modern finance, the trouble source of managerial power
understanding executive compensation focuses on a different link between the agency problem
and executive compensation, which we label as “managerial power approach” and to sum up,
under this approach, executive compensation is viewed as part of agency problem as well as a
recognized, some features of pay arrangements seem to reflect managerial rent seeking rather
than the provision of efficient incentives (e.g., Blanchard, Lopez-deSilanes, and Shleifer,
Freeman (1984), define stakeholder as those group or individual who can affect or affected by
the achievement or action of the organization’s objectives. In the last two decades the
stakeholder approach to understanding the firm in its environment has been a powerful tool,
intended to broaden management’s vision of its role and responsibilities beyond the profit
concluded that the stakeholder theory of the firm is used as a basis to analyze those groups to
the mirror image of corporate social responsibility where instead of commencing with a
business and looking out into the world to see what ethical obligations are there, stakeholder
theory starts in the world. For instance, when a factory produces industrial waste, a CSR
perspective will automatically attaches a responsibility to the factory owners to dispose of the
waste safely without causing a harm to the society and the environment. However, there is a
different perspective from a stakeholder theorist where it begins with those people who living
in the community who may find their environment poisoned, and begins to talk about business
ethics by insisting that they have a right to clean air and water. Therefore, they are stakeholders
in the company and their voices are important as well as contribute to corporate decisions.
According to Freeman (1984), firms could use CSR as a solution to resolve the conflict
between managers, shareholders, and other non-investing stakeholders. Donaldson and Preston
(1995) argue that the value of a firm depends on the interests of all stakeholders, and firms that
practice stakeholder management will, other things being equal, outperform others that do not.
The reason is that CSR activities are included few components such as employee relations,
community, environment, and diversity of the workforce, it has received huge consciousness
for its potential role in resolving conflicts among stakeholders (e.g., Jensen 2002; Calton and
Payne 2003; Scherer et al. 2006; Cespa and Cestone 2007; Harjoto and Jo 2011; Jo and Harjoto
2011a, b).
Under this circumstances, we expect the relation between CSR and CEO compensation
to be negative for the following reasons. First, CEOs incentive will take relatively lower pay
than those of socially irresponsible firms to reduce potential conflicts of interests among
managers and other stakeholders such as employees, NGOs, social activists, government and
to improve the fairness concern of a wealth distribution issue. Second, according to Potts
(2006), in spite of the fairness of the recent debate over excessive executive compensation,
virtue ethics would suggest that a more modest pay is desirable for a CEO with high social and
ethical standards. Third, firms that actively undertake CSR activities will also face a lower level
of firm risk due to a smaller degree of conflict of interest between top management and
Freeman (1984) argues that managers must satisfy different groups (e.g. workers,
customers, suppliers, local community organizations) who can influence firm outcomes.
According to this view, managers are not allowed to exclusively focus on the needs of
shareholders or the corporate owners. The stakeholder theory suggests that it can be beneficial
for the firm to engage in certain CSR initiatives that non-financial stakeholders see as
important, because otherwise these groups might withdraw their support for the firm.
2.2.4 Stakeholder Theory and Compensation
Gray, Owen and Adams (1996) classify that stakeholder engagement in an organization can be
Kuratczyk and Estey (2007) qoute that stakeholders as well as academics have targeted
executive compensation for criticism over the past several years and the purpose of the
encourages a positive behaviour, many a time executives take advantage of their governing
position and engage to an unhealthy activity to increase their personal wealth at the expense of
. For theoretical perception into CEO compensation, the economics, finance and
management literature has inclined to generally rely on the principal-agent contracting model
pioneered by Mirrlees (1976), Holmstrom (1979) and Grossman & Hart (1983). This
perception views CEO compensation to be a smaller system where the aim is to align
& Maug (2007) introduce that the standard principal agent model cannot offer the
compensation contracts for U.S. CEOs. The key factor is because CEO compensation with
smaller base salaries and no stock options reduce compensation costs by 20% while cost the
same incentives and utility to CEOs. Dittmann & Maug (2007) also show that CEO pay in
principal-agent must be lower than the value of outside opportunities (in utility terms) due to
the agent participation constraint and yet if the an organization generates income by renting
part of the building and the CEO had bargaining power over the firm’s resource rents, then,
internal compensation will likely higher than the CEO’s outside reservation wage.
Rampling, (2012 p.13), “under the shareholders theory, non-shareholders has come to
be used to refer as “means” to the “ends” of profitability while under the stakeholders’ theory,
the interests of many non-shareholders are also referred as “ends”. To a better understand,
Rampling, (2012, p.13) “claim that companies may provide one, or the other, but not both or
one only at the expense of the other, in a zero sum game which conclude that the workers can
This study contributes to the literature in a few ways. First, most of the previous studies are
concentrated on the USA (Cai et al., 2011) and Canada (Sapp, 2006), as this topic has not many
people do for research in Malaysia perspective, we provide evidence from the developing
country. This topic has done by several researchers from the developing country and there are
many of previous studies disclose more about this topic. (Sapp, 2006) point out that several
Miles & Miles (2013) is one of the previous study to explore the relationships between
whether potential compensation and social performance links are coming at the expense of
company financial performance. The measurement of the variable for corporate social
performance firms are in each of eight categories Innovation, people management, use of
corporate assets, social responsibility and quality of management, financial soundness, long-
term investment, and quality of products or services. Sample collected are firms in the Fortune
1000. Results shows that companies identified as good corporate social performers do in fact
have lower levels of executive compensation and there is some support found for a positive
relationship between social and financial performance. This paper has big sample which is
1000 firm under fortune ranking from 2005-2007. Include financial performance as the
dependent variable. Basically, the hypothesis of this paper hypothesize a negative relationship
between CEO compensation and CSR Performance. This study points out that companies that
focus on growing a better CSR for the companies will spend less on ceo compensation. Because
it allows a company make a story statement of commitment to all of its stakeholders especially
Rekker, Benson, & Faff, (2014) examine the relation between corporate social
responsibility (CSR) and CEO compensation with sample collected 1988 firms. CSR measured
in three dimensions of CSR there are total CSR, CSR strength and CSR weaknesses CEO
compensation measured into various Salary, Bonus Cash and long-term. Compensation
whereas Cash Compensation is calculated as the sum of salary and bonus. While long-term
compensation is calculated based on stock granted, payouts from long term incentives,
contributions to benefits plans and severance payments. The result of the study showed that
CSR has a significant negative relationship with total compensation. The result shows an
increase in the CSR score of a firm by 1 unit is expected to decrease total CEO compensation
by 2.2%. The finding support the hypothesis. Regardless of this study, huge sample (1988
firms) from year 1996- 2010. This paper include the impact of gender in Ceo compensation
CEO compensation with final sample of final sample 1,946 firms. The measurement used in
this study are ceo compensation total Compensation and Cash Compensation while CSR in
terms of community, diversity, employee relations, environment, and product quality. Finding
showed that the lag of CSR adversely affects both total compensation and cash compensation,
Francoeur, Melis, Gaia, & Aresu (2017) the relationship between CEO compensation
and firms’ environmental commitment with sample of 520 large listed firm by measuring
compensation as incentive and CSR as environmental Performance. Results show that CEOs
do not necessarily act opportunistically; rather some of them may be willing to act as stewards
of the natural environment and accept a lower, less incentive-based compensation from
environment friendly firm. Also provides evidence of the important influence of the
Karim, Lee, & Suh (2018) examine how firms' corporate social responsibility (CSR)
performance affects CEO compensation structure with final sample of 4344 firms with
measurement of CEO compensation such as salary, bonus, restricted stocks, stock options,
pensions, and other annual compensation. CSR measures are based on six main categories:
governance and the compensation of top executives in Canada. The hypothesis development
mention that there is an inverse relationship between CSR and CEO compensation. This article
finds that family-owned firms and firms with a controlling shareholder pay their CEOs less and
the gap created between CEO and NEOs is less. This paper points out that internal measures
of corporate governance based on the characteristics of the members of the board of directors
compensation. We find that having more directors on the board of directors, more directors on
multiple boards and more directors who have sat on the board longer are related to an increase
shareholder and the board having a larger equity position in the firm are both related to lower
executive compensation. Large samples are analyzed in this paper and there are 400 canadian
companies.
Heron (2016), research done base on US perspective, examine the relationship between
CEO Compensation and CSR dislcosure type and quality. The construct of CSR comprised of
three components, there are environmental, social and Corporate Governance. In order to get
a better undersatnding, the researcher consider how each of the three underlying CSR
components is associated with CEO compensation. The study uses a sample of 9306 firms from
2007 untill 2014. The study finds out that there is no significant association between CSR and
CEO compensation. This lead the researcher to explore the relationship between each of the
three underlying CSR components with CEO Components. The study hypothesized three
underlying CSR components that associated with CEO Compensation, there are;
My study is differs from certain ways compared to the previous studies. First, my
sample period, 2014-2018 with specific reason that occure during that timing. The prior studies
that meet to any part of this period are Rekker, Benson, & Faff, (2014); Heron , (2016);
Francoeur, Melis, Gaia, & Aresu, (2017); Buiten, (2017) & Karim, Lee, & Suh, (2018). Second,
the sample of data, is smaller than the data sample for the previous studies. Previous studies
conducted the research based on the developed countries which have its own advance system
to collect the data. For example a prior study from Cai, Jo, & Pan, (2011) use a database
provided called Kinder, Lydenberg, and Domini’s (KLD’s) Stats database. According to Cai,
Jo, & Pan, (2011, p. 163) “in particular, KLD’s information social rating criteria contain
strength ratings and concern ratings for community, diversity, employee relations,
environment, and product quality”. When all these informations are well provided, it will be
less limitation and become easier for the researcher to complete the data collection process.
While my data collection process is based on the annual report because Malaysia does not have
a database for outsiders to reveiew or collect information on companies’ CSR and that will be
data collection.
found from this gap is that this study has not been conducted base on context of Malaysian
companies. This context can be a guidance and source to the other academics in account and
ethics field and also to the Malaysian corporate companies. Fourth, this study relies on annual
report from Bursa Malaysia as the main tool of data collection. This is why limitation has
Fifth, my research focuses on companies’ CSR disclosure in Malaysia. One prior study
has done based on CSR disclosure but the samples are based on Canadian companies. In
addition, Canada is a very well developed country as we all know and there is one perspective
of CSR activities we could see. On the other hand, my research is conducted in a developing
country and this is another prespective of CSR activities that I could provide to the country.
Lastly, the measurement that makes my research is different is there are four uderlying
components of CSR while compensation there are two components involve. Components that
involve under CSR are employee relation, community involvement product quality and
environment while compensation are salary and bonus. There is one prior study I am aware
that the measurement use is almost similar to my measurement that is Heron (2016). The study
conducted by Heron involves three underlying components of CSR. There are corporate
The board of directors is responsible in order to determine CEO compensation value before it
is approved by shareholders (Kazan, 2016). CEO who is being paid highly will have the
trustworthy of the Investors and also prove his worth (Tariq, 2010). Conventionally the
executive compensation had been connected with the performance of a company and it was
deemed that the high pay for a CEO was justified. Countries like Britain have developed new
legislations like „say on pay‟ to control the pays of the chief executive officer and influence it
through the voice of the shareholders (Ferri and Maber, 2014). The influence of Board of
directors on the compensation of the CEO caused a major function of the Board of directors
which is to mitigate agency cost and reduce the conflict between the management and
shareholders (Fama and Jensen 1983). To view the history of executive compensation as one
of ever increasing pay. In fact, executive pay levels in the U.S. fell during World War II and
did not change much from the 1940s to the mid-1970s, when they started their meteoric rise
(Edmans & Jenter, 2017). Randoy & Nielsen (2002) mentions that the CEO compensation in
the highly egalitarian Scandinavian countries are small compared to the compensation in other
European countries.
Gorski, Fuciu & Croitor (2014) pointed out that there is no fix definition of CSR even
this has been used by many people. During the twentieth century, in order to build a healthy
society, CSR was connected with the market performance (Gorski, Fuciu & Croitor, 2014).
Essays, UK (2017) mentioned that CSR is very important for every business all over the world
and this concept has continued to grow over the decades. CSR is an action and it is an action
that must be followed as it is a requirement by the law (Caroll, 1999). Davis (1990) argued that
CSR is not a good idea to practice but it should be performed in a management, as this concept
could be the reason of having a good opportunity and long-run economic gain to the firm. Tilt
(2016) highlighted that there are more companies all over the world are involved in CSR, and
therefore there are providing spare social & environment information to the public. Most
corporations are willing to invest more in CSR to gain long-term profitability (Kane, 2002).
2.5 Other Literature
Corporate social responsibility (CSR) basically introduce to a wide range of actions taken by
companies to cut less their negative and improve their positive impacts on society on both
terms social and environment (Carroll 1999). Stakeholder concerns and ethical issues such as
employess wellbeing, conditions of labour in the production area, quality of products as well
as economic aspects like cost incurred and revenue generated, represent an integral part of the
CSR concept (Dahlsrud 2008). Hence, the disclosure of reliable and timely financial
confidence regarding the firm’s claims, operations and future viability in its relationships with
financial and non-financial stakeholders (Yip et al. 2011; Kim et al. 2012).
However, firms have been reported to engage in earnings management (EM) to unclear
the financial information rather than reveal their true financial characteristics (Gaver et al.,
1995; Burgstahler and Dichev 1997; Vinten et al. 2005). Earning Management only occurs
when managers use judgment in financial reporting and in structuring transactions to modified
financial reports, either to mislead stakeholders about the underlying economic performance of
the firm or to influence contractual outcomes that depend on reported accounting numbers
(Healy and Wahlen 1999). Earning Management essentially has a negative influence on the
Under this conflict-resolution hypothesis, this research predicts the CSR and Ceo compensation
to be positively associated for the following reasons. Barnea and Rubin (2010), view CSR
engagement as a principal-agent relation between managers and stakeholders as they qoute that
if the managers and stakeholders overinvest in CSR, it will lead them to a better reputation as
a good citizen. Graafland, Kaptein, & Marzereeuw (2010) propose that there is a certain level
Milbourn (2003), points out that there is a positive relationship between CEO
compensation under component of stock-based and CSR as the CEOs repution are improved,
they will enjoy a better reward and increasing their power. Unfortunately, the current study do
not include measurement of stock-based as for the existance of limitation of data collection
stock-based.
Heron (2016), finds that firms that disclose either two components (corporate
governance and social) or three components of CSR (corporate governance, social and
environment) earn higher compensation compared to the firms that only disclose one
components (corporate governance). Different patterns exist for the different underlying
Under this conflict-resolution hypothesis, this study expects the engagement between CSR and
CEO compensation to be negative for the following reasons. Companies that grow a better CSR
will spend less on CEO compensation. Because it allows a company make a story statement of
commitment to all of its stakeholders especially in the face of economic challenge by reduce
CEO pay (Miles & Miles, 2013). Wade et al (2006) and Anderson Bateman (1997), quote that
the demotivating potential of large gaps between employee salary and executive salary usually
recognised when companies are concern and focus on the CSR Performance. They are likely
more interested in sharing value created by the company with all stakeholders. Rekker, Benson,
& Faff, (2014) suggest that Ceo Commpensation will decrease as their income will trade off
for CSR satisfaction. While Potts (2006) argue that CEOs that contribute more on CSR deserve
high compensation than CEOs than contribute less on CSR activities. There is also a different
perspective by (Potts, 2006; Reker, Benson & Faff, 2014), that CEOs will be proud to be
example by putting more effort and focus on Companies social performance and to be rewarded
by doing the right thing although this sacrifice will lead them a low compensation.
Cai et al. (2011), view, CEOs that give more responsible on firms’ CRS will have low
compensation than those CEOs that socially irresponsible to alleviate the potential conflicts of
interests among managers and stakeholders. Saphira (2013), points out that Ceo compensation
will decrease as their income will trade off for the satisfaction of CSR firms activities.
Another theory that is important to understand that CEO compensation is the principal-
agent problem. Shareholders have information asymmetry with CEOs and they cannot directly
control the actions of the CEO’s, arising moral hazard (Dechow & Sloan, 1991) & (Page jr,
1991). According to Dechow & Sloan (1991) found that CEOs cut expenditures on R&D in
their final years in office. They do this to cut costs, which positively affects the short-term
performance and their compensation (Dechow & Sloan, 1991). They also found that this
behavior does not occur when CEOs own stock themselves. This alignment with stockholders’
interest makes the CEO behave in a way that is best for the shareholder (Dechow & Sloan,
1991).
According to Cai et al. (2011) with a view on the other context which hypothesize that
there is negative relation between employee relation and CEO Compensation and this gap is
created because of employees feel unfairly treated as for the payment that received by the CEOs
are higher compared to them. Cai et al. (2011) also quote that negative relationship between
CSR and CEO Compensation occur because when CEO receive low compensation compared
to the employees this will reduce the gap created between CEOs and employees as well as
improved the relationship between them. In summary, this research expects the following:
RESEARCH METHODOLOGY
3.1 Introduction
In this chapter focuses on the value of sample collected, method that will be applied, type of
sample technique, measurements that underlying on both CSR and compensation also
components that will be included under control variables in this paper. Model development
also will be provided as the guidance in order to test the hypothesis between CSR and CEO
compensation.
3.2 Sample
This research utilised a sample of non-financial companies that listed on the main market of
Bursa Malaysia where the observation during the period of 2014 to 2018. Utilities and financial
companies are excluded from the sample. “In general, companies in the finance sector are
subject to different regulatory and disclosure requirements and also material differences in their
types of operation” (Ju Ahmad, Ahmad, Rashid, & Gow, 2017, p.72).
“Although a handful of companies make such disclosures in their web pages, these are
duplications of information disclosed in their annual reports” (Ju Ahmad, Ahmad, Rashid, &
Gow, 2017, p.72). According to Michelon and Parbonetti (2012), disclosure on the website is
not considerable because the content analysis may contain less information and cannot be
performed reliably and consistently given that we cannot track when the web-pages are
published or updated. For that reason, data collected will be based on annual report, as it was
This research focuses on CSR and compensation the board of directors in the company
from 2014 to 2018. This leads to a population value of 799 that listed on the main Bursa
Malaysia from 2014 to 2018 including the financial companies. However, after excluded
financial companies, the result shows that the new population is 369 companies. Sample needed
Bursa Malaysia. Simple random is the technique on how the companies will be selected.
According to Gravetter, F.J & Forzano, L.B (2011), this technique has been stated as the logic
behind simple random sampling because it removes bias from the selection procedure and
3.3 Measurement
The dependent variables in this research are based on two different measures of CEO
Compensation which is total compensation and cash compensation. As discussed earlier, this
Independent variable in this context, is referring to McGuire et al. (2003) distinguish between
three dimensions of CSR, there are, total CSR, CSR strengths and CSR weaknesses. CSR
strengths and weaknesses represent the sum of strengths or weaknesses of all social metrics.
Control variables in this study include the following control variables. There are firm
characteristic: firm size, Tobin’s Q Leverage and ROA,and governance characteristics: CEO
ownership, board size and board independence. This choice of specification is generally based
Pan, 2011) there is a significantly positive relation between firm size and CEO compensation.
Quote from Bebchuk and Fried (2003) managers generally exploit firm size to justify their
compensation. But there is an argument that could also be explained by a “market-based view
that larger firms employ superior executives and they get paid better” (Rosen 1982 cited in Cai,
Jo, & Pan, 2011, p.164). In addition, firms with higher growth opportunities are likely to need
better executives, so the executive compensation would be higher (Cai, Jo, & Pan, 2011).
Following Faleye (2007), Tobin's Q (TOBINQ) is included as one of the firm characteristic
measurement as a proxy for firm value. This is calculated as the market value of assets over
the book value of assets, where the market value is the sum of the book value of assets, the
market value of common stock, and deferred taxes minus the book value of common stock. For
explanatory variables, we include the proportions of cash- based compensation and their
Morck et al. (1988) document that the relation between inside ownership and Tobin's
Q shows a positive figure when the insider ownership is between 0% and 5% or exceeds 25%,
while negative is appeared with the ownership of 5–25%. Karim et al (2017, p. 28), “find that
firm value, proxied by Tobin's Q, decreases with the proportion of cash-based compensation,
and this relation is reinforced by firms' low CSR performance”. These results emphasize the
To control for prior firm performance, we include ROA in our regressions, which is the ratio
of operating income before depreciation scaled by book value of total assets. According to
(Buallay, 2017, p. 88) “the operational performance measure (ROA) was found to be higher
with companies with low corporate governance, in other words, companies with lower
CEO ownership is the percentage of the company’s shares that are owned by the CEO. Cai et
al. (2013), find that CEO compensation decreases with CEO ownership where compensation
tends to be higher for CEOs in firms with better corporate governance, as measured by the
equity ownership of the CEO and the percentage of independent directors. According to Karim
et al (2017 p. 34), “CEO ownership leads CEOs to avoid risk-taking and be more entrenched,
the fraction of independent directors on the board. The findings in Yermack (1996) suggests
that small size of boards are more effective monitors. The coefficient on board size is negative
for the proportion of cash-based compensation and positive for the proportion of equity-based
board. Weisbach (1988) and Rosenstein and Wyatt (1990) suggest that firms with a high
percentage of independent outside directors perform better than the firms with a low percentage
We develop the following model in order to examine the impact of CSR on CEO
Compensation.
Model above documented from (Core et al.,1999 and Hwang and Kim, 2009, cited in
Cai et al., 2013) where this research use lagged values of the economic determinants and
measured only based on cash-based salary and bonus compensation. Cash-based compensation
is regarded as a short-term incentive based on prior studies of Cai et al (2013) and Karim et al
(2017). These two studies continue be the main reference for the other control variable of firm
underlying components; employees, community, product quality and environment based on the
long-term incentive has been excluded from my study as the data is limit in Malaysia.
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