Corporate social responsibility and pay ratio: why do socially responsible firms pay their employees more?

We examine whether corporate social responsibility (CSR) performance in firms influences pay inequality, as measured by the proportion of CEO pay relative to average employee pay. Social comparison theory suggests that CSR performance will lead to lower pay inequality as CEOs seek to avoid potential undesirable employee performance associated with negative perceptions of pay fairness. Tournament theory, however, suggests that both firms and the most talented employees benefit from maintaining higher levels of pay inequality, stating that extraordinary efforts lead to rewards for strong performance. Our findings provide evidence in support of the predictions of social comparison theory, with firms exhibiting lower levels of pay inequality when their CSR performance is relatively strong. We also find that a negative association between CSR and pay inequality is stronger after the introduction of disclosure pressure designed to mitigate opportunistic behaviour in top management. Overall, our evidence highlights the positive impact of CSR performance on pay inequality.