CEO compensation and financial distress: the role of corporate social responsibility

Abstract

Purpose – The present study examines the effect of CEO compensation on the likelihood of financial distress (FD). Further, the mediating role of corporate social responsibility (CSR) is investigated in this study. Design/methodology/approach – The study’s sample comprises 140 non-financial Pakistan Stock Exchange (PSX) listed firms from 2010 to 2021. CEO compensation includes salary and bonuses, perquisites and stock options to the CEO. The FD was measured through Altman’s Z-score. A multidimensional financial approach is utilized to assess the firm’s CSR engagement. The analysis was conducted using panel data estimate techniques such as FEM and REM. Several additional tests are performed to check the robustness of the results. Findings – Based on the four-step procedure for mediation analysis outlined by Baron and Kenny (1986), we discovered that CSR has a significant inverse effect on FD, CEO compensation has a significant positive influence on CSR, where the significant inverse effect on FD, and finally, this association between CEO compensation and FD is not direct instead it is mediated through the CSR. Practical implications – The government and authorities must compel or encourage businesses to pay their CEOs competitive cash-based compensation. Furthermore, better pay encourages managers to employ corporate social responsibility as a business strategy. This will improve the firm’s performance and keep it out of financial distress. Originality/value – Several studies have investigated the influence of CEO salary on corporate performance, but the impact on FD has yet to receive much attention. The current study’s goal is to fill this gap. Furthermore, the mediating role of CSR has substantially added to the research.