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ACCT 202 Principles of Managerial Accounting
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Abstract
Purpose – The purpose of our paper is to empirically examine the conjectures, which prior literature suggests, that employees work more productively in socially responsible companies and employees are willing to work for less when they work for these companies.
Design/methodology/approach – This study uses ordinary least squares regression to examine the relationship between corporate social responsibility (CSR) and employee performance and between CSR and employee cost. Further, 2SLS is used to address the endogeneity issue.
Findings – The results indicate a positive relation between CSR and employee performance, suggesting that employees in socially responsible companies generate better operating performance than their peers in less socially responsible companies. Findings also reveal that socially responsible companies incur higher labor cost.
Research limitations/implications – First, the CSR ratings constructed by KLD Inc. are an approximate measure of CSR performance. Better CSR measures may yield stronger results. Additionally, the sample firms in our study are relatively large firms. Caution needs be exercised when
readers generalize these conclusions. Finally, this sample only consists of public firms. Whether these conclusions hold in private firms remains unknown. The above issues can be investigated in future studies.
Practical implications – The findings of our study should interest managers who contemplate engaging in socially responsible activities, investors and financial analysts who assess firm performance and policymakers who design and implement guidelines on CSR programs.
Originality/value – This is the first paper that directly tests the association between CSR and employee performance and cost. Thus, this study contributes to the CSR literature by offering evidence to show a positive effect of CSR on employee performance. It also contributes to the management accounting literature.
Keywords CSR, Employee, Corporate social responsibility, Employee performance, Employee cost Paper type Research paper
Introduction
Corporate social responsibility (CSR) can be defined as “the voluntary integration ofsocial and environmental concerns into business operations and into their interaction The authors thank Janie Chang (editor) and an anonymous referee for their constructive comments and suggestions. The current issue and full text archive of this journal is available on Emerald Insight at with stakeholders” (European Commission, 2002). CSR has drawn much attention in recent years. Previous studies have concentrated on the link between CSR and a company’s financial performance. Abundant empirical evidence exists to support a significant positive relation between CSR and a company’s financial performance. That is, engaging in socially responsible activities can improve financial performance.
However, little empirical research has focused on the impact of CSR on employees, animportant group of stakeholders. Understanding the relation between CSR and employee performance is important because the success of a company largely depends on its employees. Our paper attempts to fill this gap in the literature. Prior CSR studies (Porter and Kramer, 2006) argue that CSR can increase employee commitment and morale to their company and suggest:
• employees work harder in socially responsible companies; and
• employees are willing to work for less when they work for socially responsible
companies. To empirically examine the above two suggestions, we posit that CSR is positively related to employee performance (H1) and is negatively or positively related to employee cost (competing H2a & H2b). We argue that, even if employees are willing to work for less for socially responsible firms, their salaries and benefits are still driven by other factors such as the attitude of their employers toward them and the supply and demand for labor. It is rather difficult to predict a positive or negative relation between CSR and employee cost without empirical evidence. Thus, we use competing hypotheses (H2a and H2b) for H2.
Following prior studies (Sanchez and Benito-Hernandze, 2015; Stuebs and Sun, 2010), we use two alternative ratios (sales per employee and net income per employee) to capture employee performance and one ratio (employee cost per employee) to measure the employee cost[1]. Employee cost is a unique item in Compustat database because only a small proportion of companies report this item. To maximize the power of our analysis, we use two samples to test our two hypotheses. We obtain financial data for the period 1995 through 2013 from Compustat, and CSR data from the Kinder, Lydenberg and Domini’s database. Our sample for testing H1 consists of 19,646 firm-year observations, while our sample for testing H2 consists of only 1,126 firm-yearobservations due to the sparse population of employee cost data in Compustat.
Our regression analysis based on clustered standard errors reveals that CSR isn positively related to our two measures of employee performance (sales per employee and net income per employee) at a significant level, indicating that actively participating in CSR activities can improve employee performance. In other words, employees work more productively in socially responsible companies. Thus, the findings lend support to the employee performance hypothesis (H1). For the employee cost hypotheses (H2a and H2b), we find a positive and significant relation between CSR and employee cost, suggesting that socially responsible companies pay higher salaries to their employees.
This evidence supports H2b which states that employee cost is higher for socially responsible firms. This finding suggests that socially responsible firms attract talented employees who may possess higher education and better work skills than employees in peer firms. Consequently, socially responsible firms are willing to provide their employees with higher salaries to motivate and retain them
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