Journal of Business Ethics

, Volume 69, Issue 4, pp 317–329

The Effect of Ethical Fund Portfolio Inclusion on Executive Compensation



This paper divides firms in the Standard and Poor’s 500 (S&P 500) into two groups based on inclusion in or exclusion from the Domini Social Index (DSI). Inclusion in the DSI is interpreted as a positive indicator of ethical status. Using data for the 1992–2003 period, I provide evidence that chief executive officer (CEO) compensation, other executive compensation, and director compensation tend to be lower in DSI firms than in other firms in the S&P 500. This applies to the unconditional group averages (and medians) and is particularly striking given that DSI firms as a group had better financial performance than the other firms. This finding is also true in a regression framework that controls for other influences on compensation, including firm size and financial performance. In a regression context, the estimated discount for CEOs of DSI firms is approximately 12% for both current compensation (salary and bonuses) and total compensation (including the value of options). These results are consistent with the expectation that some senior executives require a “compensating differential” to accept positions in firms with less attractive ethical status. It is also consistent with the expectation that some firms with positive ethical status might use more restraint in setting executive compensation.


compensating differential corporate social responsibility Domini Social Index ethical funds executive compensation 



Chief Executive Officer


Database on financial information maintained by Standard & Poor’s


Domini Social Index – a portfolio of large American firms selected on ethical criteria


Return on Assets

S&P 500

Standard and Poor’s list of 500 major American publicly traded firms


Total Return to Shareholders (based on dividends and capital gains)


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Copyright information

© Springer Science+Business Media, Inc. 2006

Authors and Affiliations

  1. 1.Sauder School of BusinessUniversity of British ColumbiaVancouverCanada

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