Can Socially Responsible Firms Survive Competition? An Analysis of Corporate Employee Matching Grant Schemes
Ning Gong; Bruce D Grundy
Review of Finance, Volume 23, Issue 1, 1 February 2019, Pages 199–243, https://doi.org/10.1093/rof/rfx025
Coordinating Employees Charitable Giving through Employee Matching Grants
In 2017, total US corporate giving amounted to $20.77 billion and approximately one third of S&P 1500 firms offer matching grants to support employee charitable giving. How can companies afford to be philanthropic when they must compete for capital and labor? We examine the public good nature of charitable giving and show that properly-designed matching schemes can coordinate employee giving, increase employee satisfaction, and allow charities to raise more money, and can do so without sacrificing shareholder profits.
Public goods are associated with “free-rider” problems. Even when socially-conscious employees derive satisfaction from giving per se, they still benefit from free-riding on the contributions of others and the total amount of public goods provided through a decentralized, voluntary contribution mechanism will be suboptimal. One way to mitigate the free-rider problem is to rely on a central planner who coordinates donors’ giving. Gong and Grundy show that corporations can play such a role through either corporate lump-sum donations or corporate matching grant schemes.
Both lump-sum donations and employee matching schemes can achieve the same coordinated outcome if all employees are socially conscious. However, when not all employees are socially conscious, “regular” employees (i.e., those who value the public good less highly) can be poached by rival firms that do not have a corporate-giving program and can therefore afford to offer higher take-home salaries. The higher take-home salaries at rival firms might also tempt socially-conscious employees to switch employers. Interestingly, matching schemes will be less vulnerable than lump-sum corporate donation to switching by socially-conscious employees. If an employee does defect from a firm with a matching scheme, their former employer’s match will end, and the utility of the socially-conscious switching employee will be reduced.
Well-designed matching schemes can forestall switching by socially-conscious employees under either of two conditions: firstly, if socially-conscious employees are more productive when they work with like-minded colleagues; and secondly, if socially-conscious employees gain personal utility from working together. Our empirical analysis documents that both conditions are satisfied in practice. Labor productivity at firms with matching schemes is approximately $20,000 per annum higher than at otherwise equivalent firms without matching grant schemes. This higher productivity allows socially-conscious firms to offer a competitive take-home salary while also making charitable contributions. Further, employees at firms offering matching schemes are likely to be more satisfied since firms with matching schemes are more likely to appear on Fortune magazine’s “Best 100 Places to Work for in America” list. Our empirical analysis confirms that firms with matching grants schemes can survive labor and capital market competition while improving employee satisfaction. Not only are employees better off, matching schemes increase the amount raised for provision of the public good relative to the amount raised with either uncoordinated employee-giving or a corporate lump-sum donation program.