Information or pressure? The effect of director experience on CEO CSR compensation adoption and design

Abstract

AbstractWe investigate the impact of director experience in integrating social responsibility criteria into CEO compensation (corporate social responsibility [CSR] contracting) in other firms on the adoption and design of CSR contracting within focal firms and address the question of whether such experience brings information or pressure to focal firms. Using hand‐collected data of a sample from the Standard and Poor's (S&P) 500 index, we find that director experience is positively associated with the likelihood of CSR contracting adoption. This effect is particularly pronounced in challenging situations where firms require more information for the adoption, such as when they have diverse stakeholders with varying CSR interests and operate in unpredictable market environments. Additionally, director experience has a positive effect on the use of quantitative CSR targets in initial contract design, especially in these challenging scenarios. Interestingly, the positive effect of director experience on CSR contracting adoption does not vary with firms’ peer legitimacy pressure. Our findings suggest that director CSR contracting experience provides valuable information that fosters learning rather than imposing institutional pressure that leads to isomorphism when firms make CSR contracting decisions. By disentangling the intertwined role of director experience, our research offers insights into how it influences the adoption and design of innovative management control practices within firms.