Behavioral Agency Model and Corporate Social Irresponsibility: Uncovering the Implication of Fairness in CEO Compensation

Abstract

Behavioral agency model (BAM) posits that executive risk preferences are influenced by losses to their current option wealth relative to gains from their prospective option wealth. Accordingly, current option wealth attenuates risk-taking while prospective option wealth amplifies risk-taking. In the context of corporate irresponsible behaviors, this study attempts to advance the BAM by theorizing how the presence of conditions that give rise to distributive and procedural injustice in CEO compensation can further amplify the positive effects of CEO prospective option wealth on risk-taking, thereby destroying stakeholder value. Our findings, based on a longitudinal cross-sectional sample of 8,669 firm-year observations for the period 2001 to 2018, support our theorization that CEO perceptions of unfairness in compensation amplify excessive risk-taking, thereby increasing the likelihood of corporate social irresponsibility. Our study has important implications for advancing the BAM and for the study and design of executive compensation.