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The hidden costs of corporate social responsibility

Summary:
Companies often engage in activities of corporate social responsibility such as donating a share of profits to charity. Previous research suggests these initiatives can help attract and motivate workers, even at the cost of giving up part of their compensation. This column presents experimental evidence that shows, however, that when workers can choose who they want to work for, they prefer firms that offer a higher wage, and are attracted by a firm’s corporate social responsibility only when they consider their wage offer as ‘fair’. Further, if companies compensate donations to charity by reducing workers’ wages, this could ultimately harm workers’ wellbeing, depending on the worker’s views on the donations.  The term corporate social responsibility (CSR) is

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Companies often engage in activities of corporate social responsibility such as donating a share of profits to charity. Previous research suggests these initiatives can help attract and motivate workers, even at the cost of giving up part of their compensation. This column presents experimental evidence that shows, however, that when workers can choose who they want to work for, they prefer firms that offer a higher wage, and are attracted by a firm’s corporate social responsibility only when they consider their wage offer as ‘fair’. Further, if companies compensate donations to charity by reducing workers’ wages, this could ultimately harm workers’ wellbeing, depending on the worker’s views on the donations. 

The term corporate social responsibility (CSR) is generally used to refer to any self-regulated initiative that a company might pursue to contribute to a societal goal, such as reducing its carbon footprint or improving its ethical practices (Tirole 2017). Perhaps the most common CSR initiative is to donate a portion of the firm’s profits to charity.  Corporations might choose to make charitable donations such as direct giving or setting up a foundation. For all channels, corporate donation amounts have been increasing significantly. In the US in 2014 alone, companies donated around $18 billion (Bertrand et al. 2020). Other reports provide similar estimates, with Fortune Global firms spending around $20 billion a year on CSR activities (Meier and Cassar 2018), and more than 90% of the 250 largest companies in the world now producing an annual CSR report (KPMG 2017). These figures should not be too surprising, since investing in CSR appears to pay off, both in terms of increased sales (Gneezy et al. 2010) and lobbying power (Bertrand et al. 2018, 2020). More recently, studies have also suggested that CSR can also be an effective human resources management tool to attract and motivate workers (Bhattacharya et al. 2008). 

CSR as a human resources management tool 

An extensive literature in labour economics shows theoretically and experimentally that offering a higher wage leads workers to reciprocate by working harder (Akerlof 1982, Fehr and Gächter 1998). A common feature of these studies is that they use a setting called the ‘gift exchange game’ (Fehr et al. 1993). In a typical gift exchange experiment, some participants play the role of a firm and the others play the role of a worker. The firm first sets a wage and then the worker chooses how much effort to provide. The firm earns a profit that increases the more effort the worker gives and decreases the higher the wage they set; the worker’s earnings increase the higher the wage she is offered, and decrease the more effort she gives.

The results of most gift exchange studies robustly demonstrate a worker’s preference for reciprocity. Even if a worker can earn the most money by providing minimum effort, in virtually all gift exchange studies workers reciprocate a higher wage offer with higher (costly) effort. More succinctly put, workers who are offered a higher wage reward their employers by working harder. 

Recent studies have further shown that similar levels of effort to those generated by higher wages can be induced when firms invest in CSR (Tonin and Vlassopoulos 2012, 2014). Further, some of these studies suggest that workers, in response to a firm’s CSR, might be willing to provide the higher effort even when the firm offers a lower wage. These findings are consistent with a recent survey finding that three-quarters of millennial respondents say they are willing to accept a lower wage to work at a socially responsible company (Peters 2019). 

Human resources incentives must align with workers’ preferences

One of the limitations of these gift exchange studies is the absence of a ‘sorting mechanism’ that would mimic labour markets outside of the lab, where workers can choose which firm to work for. It is reasonable to expect that the attractiveness of a financial or social incentive may depend on a worker’s job preferences. For example, a banker and a social worker may respond to higher wages or higher CSR donations in ways that depend on the reasons that led them into their professions. In our new paper (Briscese et al. 2021), we aimed to overcome this gap by highlighting the importance of worker choice. In our study, workers first chose which firm they want to work for, and then provided effort. In our modified gift-exchange game, we varied whether workers could or could not choose the firm they wanted to work for. We find that when workers can choose who to work for, they almost always prefer the firm offering the highest wage, and whether, or how much, the firms offer CSR only affects workers’ decisions when the wage offers from the firms are similar. In other words, CSR only serves as a tiebreaker when wages are the same. We also find that workers work harder the higher the wage they are offered, but do not work harder the more the company donates to charity.

Who benefits from CSR?

Although CSR does not motivate workers to work harder, firms offer CSR to attract workers in situations where their wage offers are in line with those by other competitor firms. Offering CSR is, however, costly to the firms, and firms appear to compensate for this loss in profits by passing on the costs to workers in the form of lower wages, thus resulting in workers bearing the costs of the firm’s CSR initiative. In other words, when firms invest in CSR, workers lose a substantial part of their salaries. 

While the only measure of job satisfaction we observed in our study is wages, employees who get greater pleasure from working for a socially responsible firm may still prefer to work at a firm that offers CSR, even if this comes at a cost to their salaries. At the same time, our study demonstrates that CSR may not translate into the employees being more motivated at work. People can derive meaning by working for a socially responsible firm (Cassar and Meier 2018), but for CSR to be an effective motivating tool, it should genuinely try to contribute to a societal goal, rather than being used strategically to increase profits at the expense of workers. 

References

Akerlof, G A (1982), "Labor contracts as partial gift exchange", The Quarterly Journal of Economics 97(4): 543-569.

Bertrand, M, M Bombardini, R Fisman, and F Trebbi (2018), “Tax-exempt lobbying: Corporate philanthropy as a tool for political influence”, VoxEU.org, 3 September.   

Bertrand, N, M Bombardini, R Fisman, and F Trebbi (2020), “Tax-exempt lobbying: Corporate philanthropy as a tool for political influence”, American Economic Review 110(7): 2065-2102.

Bhattacharya, C B, S Sen, and D Korschun (2008), "Using corporate social responsibility to win the war for talent", MIT Sloan Management Review 49(2).

Briscese, G, N Feltovich and R L Slonim (2021), “Who benefits from corporate social responsibility? Reciprocity in the presence of social incentives and self-selection", Games and Economic Behavior 126: 288-304.

Cassar, L, and S Meier (2018), “Nonmonetary Incentives and the Implications of Work as a Source of Meaning”, Journal of Economic Perspectives 32(3): 215-38.

Fehr, E, and S Gächter (1998), "Reciprocity and economics: The economic implications of homo reciprocans", European Economic Review 42(3-5): 845-859.

Fehr, E, G Kirchsteiger, and A Riedl (1993), “Does fairness prevent market clearing? An experimental investigation”, The Quarterly Journal of Economics 108(2): 437-459.

Gneezy, A, U Gneezy, L D Nelson, and A Brown (2010), "Shared social responsibility: A field experiment in pay-what-you-want pricing and charitable giving", Science 329(5989): 325-327.

KPMG (2017), The Road Ahead: The KPMG Survey of Corporate Responsibility Reporting 2017

Meier, S, and L Cassar (2018), "Stop talking about how CSR helps your bottom line", Harvard Business Review 31.

Peters, A (2019), “Most Millennials would take a pay cut to work at a environmentally responsible company”, Fast Company, 14 February.

Tirole, J (2017), “Corporate social responsibility”, VoxEU.org   

Tonin, M, and M Vlassopoulos (2015), “Corporate philanthropy and productivity: Evidence from an online real effort experiment”, Management Science 61(8): 1795-1811.

Tonin, M, and M Vlassopoulos (2012), “Do social incentives matter? Evidence from an online real effort experiment”, VoxEu.org, 26 July.

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