Corporate charity can come at expense of workers’ wages

January 27, 2021
Higher pay is far more effective than charity work at attracting workers. AP Images/Stephanie Diani

Higher pay is far more effective than charity work at attracting workers. AP Images/Stephanie Diani

Corporate philanthropy is not as successful at attracting and motivating workers as several recent studies have shown, according to new research, with company charity often coming out of potential wages in order to avoid cutting into profits.

In a study published in the March edition of Games and Economic Behavior, researchers found that higher wages are up to five times more effective at attracting employees than increased corporate philanthropy, and wages are similarly more effective at motivating workers to be more productive.

Still, corporate social responsibility, often referred to as CSR, is a secondary consideration for workers considering a job offer, the researchers said, and charitable donations can act as a tiebreaker of sorts for workers considering multiple offers at the same wage level.

Several previous experiments had shown that CSR can induce higher effort by workers, thereby generating benefits for both sides of the labor market, but those experiments may have been flawed because they were more controlled than real-life circumstances would be, according to Guglielmo Briscese, a postdoctoral fellow at the University of Chicago and a co-author of the research.

For example, he said, instead of allowing participants to act as companies in previous experiments, researchers would take on that role, providing an incomplete picture of the labor market.

“So one of the limitations of that is that you do not study how firms behave,” Briscese said. “So you don’t know, actually what are the human behaviors that sort of kick in when you introduce CSR elements. You only studied the workers, but not the other side of the labor market.”

Another major limitation of previous studies, Briscese and his colleagues wrote, was the absence of a “sorting mechanism” that would allow workers to receive multiple offers from potential employers and choose the one that best suits them. Previous research published in 2018 has shown that in the presence of sorting mechanisms, monetary incentives may be more powerful than social ones.

Using a modified version of the gift-exchange game developed by economist Ernst Fehr and his colleagues in 1993, Briscese and his co-authors recruited 312 subjects, mainly university students, to act as either a firm or a worker in their experiment. Firms were able to provide job offers constituting either wages or a mix of wages and corporate philanthropy, and the workers were asked to choose their preference from the offers provided.

Firms that offered a higher wage and equal charity share compared to an alternative company were chosen 96.9% of the time, and firms that offered a higher charity share and equal wage were selected 93.8% of the time. In cases in which one firm offered a higher wage and the other offered a higher charity share, though, the higher wage was chosen 74.3% of the time, suggesting that wages remain the most important incentive for workers.

However, the attractiveness of an incentive may depend on a worker’s profession, Briscese said. For example, someone working at a nonprofit is likely more motivated by charitable donations than higher wages because they’re more concerned about the impact their nonprofit has; likewise, an investment banker likely does not care how much their employer donates to charity as long as it doesn’t come out of their paycheck.

“So understanding the reasons that lead people to self-select and choose a job in the first place are important,” he said.

One of the most striking findings of the experiment, Briscese said, is that increased corporate philanthropy “significantly reduces earnings for workers” in order to avoid a decrease in company profits.

“So unless a firm is truly like a socially responsible firm, when it’s just like a profit-seeking firm and they just use CSR as a marketing tool, then it seems, from our findings, that they will take the budget of the CSR from the wages of the workers,” he said. “So it’s sort of like a double-edged sword.” 

Briscese became interested in studying the effect of corporate philanthropy on workers after seeing results from several surveys that claimed 90% of young people prefer their employer to be socially responsible and to donate to charity.

“And one thing that we know in economics is that it’s one thing what people say,” Briscese said. “It’s another what they actually prefer to do.”

After reading academic literature on the topic, he was surprised that economists had largely confirmed the surveys’ findings and decided to look into it himself.

Briscese said he hopes that his research helps future researchers to be more careful when designing experiments in order to ensure that they more closely mimic the real world, such as introducing a self-selection mechanism.

Additionally, Briscese said his research begins to show that CSR initiatives have a cost.

“I’m hoping that more people will be slightly more skeptical about CSR, and more researchers and journalists and policymakers will look into exactly what is the purpose of these initiatives and whether they harm workers or not,” he said.

Briscese noted that the study of CSR is relatively new, with much of the literature published in the last decade and many topics still under-researched, including how corporate donations impact the operations of charitable organizations and the motivations behind corporate philanthropy.

“I think it’s going to be literature that’s going to keep growing,” Briscese said. “More and more people are going to study the actual facts of CSR.”

The study “Who benefits from corporate social responsibility? Reciprocity in the presence of social incentives and self-selection,” available online Jan. 18, 2021, from Games and Economic Behavior, was authored by Guglielmo Briscese, University of Chicago and University of Sydney; Nick Feltovich, Monash University; and Robert Slonim, University of Sydney.

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