The effect of incentive types and organizational value statements on corporate social responsibility decisions

Abstract

This study examines the effect of incentive types and organizational value statements on corporate social responsibility (CSR) decisions. It used a 2 × 2 between-subject experimental design and analyzed the data using Analysis of Variance (ANOVA). The participants were undergraduate students in the accounting department of a major university in Central Java, Indonesia. The results show that incentives in the form of recognition encourage CSR decisions more than financial incentives. This study also provides evidence that environmental-based value statements encourage managers to make CSR decisions rather than financial-based value statements. This study, however, finds there is no interaction between the type of incentives and organizational value statements on CSR decisions. The implication of the results of this study is the importance of using the types of recognition incentives and value statements that focus on sustainability to promote CSR decisions.

Keywords:

• Incentives
• recognition
• value statements
• corporate social responsibility
• experiment

REVIEWING EDITOR:

• Collins Ntim, University of Southampton, United Kingdom of Great Britain and Northern Ireland

SUBJECTS:

• Social Responsibility; Accounting, Business Economics, Environment and Development; Compensation and Compensation Methods and Their Effects; Sustainable Development; Executive Compensation

1. Introduction

The implementation of corporate social responsibility (CSR) in operational activities has become of great importance in organizations today. Within the sustainability context, the social concerns of corporations also cover environmental considerations (Francoeur et al., 2017). Recently, the climate-related situation has increased as greenhouse gas emissions continue to rise (The Sustainable Development Goals Report, 2023). Gas emissions lead to global warming and climate change. Increased awareness of the negative consequences of global warming on life has encouraged researchers and practitioners to investigate the impact of carbon emissions on operational decision-making (Jauhari et al., 2023). In practice, for example, some businesses assert their commitment to environmental protection by implementing corporate greening activities (Alzaidi & Iyanna, 2022). Environmental sustainability involves reducing pollution, regenerating resources, avoiding the use of hazardous substances, and eliminating all processes that negatively impact the environment (Rehman et al., 2022). Many managers believe that good CSR can improve company-community relations, which is crucial to earning trust. The variety of CSR practices is extensive, and there is little consensus on what a socially responsible business entails (Tian et al., 2020). Therefore, organizations see a need to integrate social and environmental aspects into their strategic decision-making process (Journeault, 2016; Wijethilake, 2017). Previous study, however, mostly explains the implications of implementing environmental responsibility that it can improve operational efficiency (Journeault, 2016), environmental performance (Anser et al., 2020), get attention from investors (Rokhayati et al., 2019), financial performance (Indriastuti & Chariri, 2021), and even affect stock volatility (Zhang et al., 2018). Moreover, environmental management of production processes has become a key success factor for market competition (Bravi et al., 2020). Companies today are more inclined to explore how to integrate societal goals (Carballo, 2023; Obel & Kallehave, 2022). However, research on CSR integration in internal company strategy is rare.

Management accounting researchers are increasingly recognizing the need to witness management controls as a package system, including specific controls affecting how other controls affect decision-making and behavior (Malmi & Brown, 2008). Within this context, management control systems are essential in helping organizations develop practices involving environmental aspects in their organizational strategy (Hopwood & Unerman, 2010; Journeault, 2016; Madein & Sholihin, 2015; Malmi & Brown, 2008) and their CSR activities (Laguir et al., 2019; Rokhayati et al., 2021).

Management control can be exercised in the form of formal and informal controls. While much management accounting research has focused on accounting-based controls, which are often formal systems, there is still a lack of knowledge of the impact of different types of controls (Malmi & Brown, 2008). Formal control systems rely on incentives to motivate employees to achieve organizational goals (Christ et al., 2016; Libby & Lipe, 1992; Merchant & Stede, 2008). Clearly defined performance measurements are necessary conditions for the effectiveness of incentives (Merchant & Stede, 2017). Based on the behavioral aspects within the agency framework, incentives also determine the choice of business model and strategy, business development, and attainment of non-financial success (Velte, 2020), and reduce agency conflicts between management and stakeholders (Hill & Jones, 1992).

According to the activation theory, however, mental enthusiasm is required to motivate individuals to achieve their performance (Gardner, 1986). He stated that employees seek activation through an array of stimuli. One of the substantial stimuli that can be used to engage employees’ awareness and commitment to their assigned tasks is compensation schemes (Fessler, 2003). Incentives can be made in the form of financial or non-financial incentives (i.e. recognition). In achieving financial performance, money and recognition incentive schemes have been substitutable. Besides monetary incentives, incentives in the form of recognition have been found to improve business and performance (Lourenço, 2016). Furthermore, it is known that tournament incentives in the form of money are substitutes for recognition incentives, as non-financial incentives, in the context of creative performance (Ilyana & Sholihin, 2021). The nature of monetary incentives has also not always proven beneficial in a normative context (Mehta et al., 2017). Additionally, CEOs may be motivated by financial incentives; they may be willing to take lower compensation in exchange for personal thoughts of the fulfillment of handling social issues (Francoeur et al., 2017). Similarly, in companies where employees perceive their commitment to society’s objectives as genuine, financial incentives may not be essential, compared to companies that appear to place less emphasis on societal goals may require financial incentives to inspire their employees (Spallek et al., 2023). In a prosocial setting, recognition incentives are considered more valuable than monetary incentives for enhancing performance (Handgraaf et al., 2013), although the effectiveness of recognition incentives is highly situational (Kosfeld et al., 2017). In relation to CSR, management control systems have been suggested to be effective in embedding CSR initiatives into companies’ plans and strategies (Crutzen et al., 2017).

Informal control systems maintain the continuity of formal control (Akinyele et al., 2020; Norris & O’Dwyer, 2004). Crutzen et al. (2017) also argue that focusing on just a single form of management control, whether formal or informal, exposes an organization towards a risk of internal conflicts. Informal controls direct organizational members’ conduct through unwritten policies, and shared values that derived from the organizational culture (Langfield-Smith, 2006; Ouchi, 1979). Informal systems predominate when resolving ethical issues (Falkenberg & Herremans, 1995). Managers could also adopt informal controls to encourage stakeholder commitment to a CSR-aligned organizational culture (Laguir et al., 2019). Hence, formal and informal control mechanisms should interact to accomplish companies’ social and environmental objectives (Bedford et al., 2016). Companies should accordingly establish ‘company values’ that regulate employee behavior (Vantrappen & Jong, 2018). Organizational values have been proven to guide behavior (Allison, 2019; Ye, 2012). As part of informal control systems, organizational values statements can enhance performance (Akinyele et al., 2020) by strengthening responsibility and setting standards (Urbany, 2005). Based on norm activation model, personal norms need to be activated to achieve social and environmental goals (Schwartz, 1977; Thøgersen, 2009). Moreover, value statements can foster social norms (Lynn Hannan, 2016) that transcend selfish behavior to prioritize the interests of the larger organization (Bicchieri, 2005).

Despite the strong support for management control systems in CSR decision-making, empirical research in this area is still limited (Ditillo & Lisi, 2016; Herremans & Nazari, 2016; Rokhayati et al., 2021). The existing literature linking aspects of management control systems and CSR has so far been constrained to conceptual performance measurements (Hopwood & Unerman, 2010; Perego & Hartmann, 2009; Searcy, 2012), measurement base in the CSR investment (Church et al., 2019; Rokhayati et al., 2021), and implementation of CEO compensation (Cordeiro & Sarkis, 2008; Deckop et al., 2006), while some suggested that CSR strategies and implementation in companies are influenced by the existence of incentives (Berrone & Gomez-Mejia, 2009; Cordeiro & Sarkis, 2008). Overall, there is still a lack of research on the effectiveness of formal and non-formal control mechanisms on CSR decisions. To address this issue, this study examines the effect of formal control (money incentives vs recognition) and informal control (social vs financial value statements) on CSR decisions. It aims to contribute to the literature in this area and the methodology by developing experimental research instruments in the context of CSR decisions.

The aims of this research are threefolds. First, this research aims to examine the influence of the type of financial incentives and recognition on CSR decisions. Second, this research examines the influence of value statements on CSR decisions. Third, this research examines the effect of the interaction between incentive type and value statement on CSR decisions. This study uses a between-subjects experimental design that involves 2 incentive types (financial and recognition) and 2 value statements (focus on profit and focus on environment). The results show that individuals make greater CSR decisions when they receive recognition incentives. Furthermore, the results show that individuals make greater CSR decisions when the company’s value statement focuses on environmental issues. This research does not find an interaction effect between incentive type and value statement. However, this research shows that the largest CSR decisions are made when individuals are aware of recognition incentives and statements of environmental values.

This research contributes to the extant literature by examining the relationship between formal control, informal control, and CSR decisions. First, this research provides evidence on CSR research using formal and informal controls on CSR decisions. Previous research shows that sustainability management control needs to include all systems and tools where managers develop and use formal and informal systems that support the achievement of CSR objectives (Crutzen et al., 2017). This study investigates types of incentives, namely financial and recognition as formal control. The results of this study support previous studies that incentive types affect performance (Cianci et al., 2013) and that recognition incentives are regarded as more important than monetary incentives for improving performance in prosocial settings (Handgraaf et al., 2013).

The second contribution of this study is that it provides additional empirical evidence of the importance of using informal control in the form of value statements (Aguiar, 2021; Akinyele et al., 2020; Kachelmeier et al., 2016). The research expands the results of the effectiveness of value statements for increasing CSR decisions. Conformity to sustainability values statement will encourage individuals to prioritize CSR decisions because a company’s values statement that highlights sustainability issues will encourage individual social norms. Moreover, the compatibility between recognition incentives and sustainability value statements results in the highest CSR decisions. These results indicate that the match between formal and informal controls that focus on social norms will produce the greatest influence on individuals in CRS activities.

The remainder of this article is presented as follows. The next section discusses the background. The sections that follow are related to the theoretical framework, literature review and hypothesis development, research design, empirical results and discussion, summary and conclusion.

2. Background

The environment is a critical component in sustainable development. Environmental factors are also important aspects of health that are directly connected with individual and population health. Air pollution is unavoidable and has become problematic in many developing countries, including major cities in Indonesia. By the end of 2024, there is a target percentage reduction in greenhouse gas emissions of 27.3 percent; also improving the Air Quality Index from 86.8 (2019) to 84.5 (2024). The Low Carbon Development approach emphasizes cross-sector policies that balance economic growth targets with efforts to reduce emissions and encourage the growth of green investment for more sustainable development (CISDI, 2021). It means the governments agree with the plan to prevent climate change by reducing emissions through mitigation.

The mandate of corporate social responsibility in Indonesia is contained in Law No. 40 of 2007 concerning Limited Liability Companies, Law No. 25 of 2007 concerning Capital Investment, and Government Regulation No. 47 of 2012 concerning the Social and Environmental Responsibility of Limited Companies. Furthermore, the achievement of SDGs is supported by the Indonesian Government with Presidential Regulation No. 111 of 2022 concerning the Implementation of the Achievement of Sustainable Development Goals. Indonesia is one of the United Nations member countries that actively participates in the development of Sustainable Development Goals (SDGs). One of the objectives is to protect the environment. Additionally, there is Government Regulation No. 22 of 2021 on Environmental Protection and Management Implementation. This regulation is a systematic and comprehensive effort to conserve environmental functions and avoid pollution and/or damage to the environment. Furthermore, in Indonesia, the Financial Service Authorities No. 51 of 2017 enacted an obligatory regulation for financial industries to conduct sustainable finance and investment.

Other countries in Southeast Asia, such as the Philippines and Vietnam, already have CSR regulations for companies. However, Malaysia, Thailand, and Singapore have not mandated CSR through official laws and regulations, but those laws and regulations encompass some key components of CSR such as human rights, environmental protection, labor law, and protecting consumers law (Tran et al., 2021). An emerging concern in CSR is assisting businesses in implementing CSR in a way that is compatible with their specific business circumstances (Virakul et al., 2009). Previous research showed that corporations with better governance are also more likely to pursue a more socially responsible agenda (Asogwa et al., 2020; Nguyen et al., 2021). Moreover, a management control system is critical in providing the integration of environmental and social activities into an organization’s strategic plans and goals (Gond et al., 2012). Management control systems implementation in CSR integration into a business strategy can encourage Indonesian and other developing-country manufacturers to implement CSR more effectively (Rinawiyanti et al., 2020). Management control systems encompass all instruments and procedures established and employed by managers to ensure that employee behaviors and decisions are consistent with the organization’s CSR-related objectives and strategies, both formally and informally (Crutzen et al., 2017; Malmi & Brown, 2008).

3. Theoretical literature review

The activation theory states that mental enthusiasm is important to motivate individuals effectively in achieving their performance (Gardner, 1986). Activation theory has been used to explain the impact of task design variances on the responses of task performers (Scott, 1966). Activation theory predicts a variety of behavioral outcomes in tasks that involve continuous repetition of a restricted set of responses to configurative simple and temporally consistent stimulus. A decrease in activation level is expected when the individual gets familiar with his or her surroundings and learns the responses required in the repeated task. If the activation level passes below the typical norm, the person will have a negative effect and will try to increase impact. If he is restricted from performing impact-increasing behavior, his performance will continue to decrease.

Social norms promote socially related behavior (Schwartz, 1973). Social norms can be used to explain differences in behavior from decisions that prioritize personal interests (Biel & Thøgersen, 2007; Thøgersen, 2008). According to Schwartz (1977), social norms are actively experienced as feelings of moral obligation rather than as intentions. The norm activation model analyzes the factors that influence human intention to engage in altruistic and environmental behaviors (Onwezen et al., 2013). Behaviors are a result of personal norms which are regulated by awareness of consequences and ascription of responsibility (Schwartz, 1977). Norm activation begins with an individual’s awareness of potential adverse consequences, which prompts feeling to take responsibility for the negative effects of not acting pro-socially.

4. Empirical literature review and hypotheses development

4.1. Incentive types and CSR decisions

The activation theory states that mental enthusiasm is important to motivate individuals effectively in achieving their performance (Gardner, 1986). Additionally, employees seek activation through a variety of stimuli. Compensation schemes are effective stimulants that can be implemented to improve employees’ awareness and effort in their assigned tasks (Fessler, 2003). The organization’s incentives can motivate and activate individual efforts and commitment to accomplishing their responsibilities.

Companies need to integrate CSR activities into the organization’s operations by developing a control system that involves CSR aspects. From a management control standpoint, companies can pursue their CSR goals by guiding managers on how to conduct themselves inside a centralized control system (Church et al., 2019). A management control system is a set of formal and informal controls (Malmi & Brown, 2008). Formal control is a set of structures, routines, and processes that employees must follow (Bisbe & Otley, 2004), which consists of planning procedures, contractual obligations, performance evaluation, and reward systems (Malmi & Brown, 2008). Incentive schemes as a formal control mechanism are used to motivate employees to improve their performance (Christ et al., 2012; Libby & Lipe, 1992). Sustainability provides new opportunities where firms need to create incentives and all the other aspects of the organizational design of the firm (Obel & Kallehave, 2022). Moreover, the implementation of incentive contracts establishes a connection between the manager’s compensation and their CSR investment or performance (Church et al., 2019).

Previous research has shown that performance is influenced by monetary incentives, feedback, and recognition (Lourenço, 2016). Social context research reveals that financial incentives and rewards crowd out because they have different motivational preferences (Bénabou & Tirole, 2010; Lourenço, 2016), in which monetary incentives discourage social behavior. For non-financial organizations, intrinsic motivation from agents potentially decreases the impact of extrinsic rewards (Bénabou & Tirole, 2006; Besley & Ghatak, 2005).

This study focuses on financial incentives and recognition because, according to previous studies, the implementation of feedback through CSR activities has a restricted understanding of financial accounting measures, and it will take time to convey an understanding of feedback, such as financial accounting (Derchi et al., 2021). Moreover, monetary incentives and recognition have outcomes utility that is considered acceptable after the individual performance is accomplished, as contrasted to feedback, which has outcome appeal in the form of information processing that governs individual actions through self-evaluation (Stajkovic & Luthans, 2001). According to the results of their research, feedback has the least impact on an individual’s performance.

Previous research showed that individual performance increases with non-financial, i.e. recognition, rather than financial incentives for prosocial settings (Ashraf et al., 2014; Handgraaf et al., 2013). Recognition can be extremely effective and motivate individuals without costing the company significantly (Luthans, 2000). Other research states that money leads to lower outcomes for individuals to help others (Vohs et al., 2006); donate to charity (Liu & Aaker, 2008) and CSR engagement (Spallek et al., 2023). Employees have also been shown to value company recognition highly (Luthans, 2000).

Furthermore, recognition strengthens the organization’s sense of support for its employees, and consequently, employees provide feedback by performing better (Wayne et al., 2002). These findings are consistent with the findings of Montani et al. (2020), who showed that employees’ perceptions of manager recognition are positively related to the significance of their work. Based on this reasoning, it is predicted that individuals with recognition incentives will prefer CSR decisions to individuals with financial incentives. Accordingly, the following hypothesis is proposed:

Ha1: Recognition incentive schemes encourage CSR decisions more than financial incentives.

4.2. Value statements and CSR decisions

Social norms have a role in socially related behavior (Schwartz, 1973). Social norms can be utilized to explain behaviors that differ from decisions that prioritize personal interests (Biel & Thøgersen, 2007; Thøgersen, 2008). The main rationale is that social norms have a tendency to regulate behavior through several mechanisms, and the extent to which they influence behavior is conditional on their prominence or salience within a particular environment (Kallgren et al., 2000).

The norm activation model proposed by Schwartz (1977) posits that the formation of personal norms is influenced by situational activators, such as awareness of need, situational responsibility, efficacy, and ability. It is based on Bicchieri’s (2005) social activation model for understanding how social norms can overcome self-serving behavior and place greater organizational goals. This social norm activation model assumes that individuals have a conditional preference for conforming to social norms and that these preferences for norms are activated by situational cues such as value statements in work settings (Blay et al., 2018).

Informal controls, which are based on social norms, tend to motivate managers to align their behaviors with the organization’s goals in situations where formal controls are lacking (Lee and Hageman, 2018). Organizational value statements can activate individual social norms. Organizational values statements can improve performance when they are part of informal control approaches (Akinyele et al., 2020). A value statement is part of the management control system mechanism, including values, beliefs, and social norms that influence employee behavior (Malmi & Brown, 2008). A value statement can lead to positive organizational outcomes, such as increased trust and perceptions of fairness, clarifying appropriate employee actions, and higher commitment to organizational goals based on internalization and identification. Organizations adopt value statements because they can guide employees by determining appropriate behavior (Urbany, 2005).

The organization’s communication of value statements as a cue can reinforce behavioral norms (Kachelmeier et al., 2016). It suggests that situational cues help determine the importance of social norms in certain situations (Abdel-Rahim & Stevens, 2018; Bicchieri, 2005). Schram & Charness (2015) argues that social norms require a shared understanding of what one should do in each situation as well as observing one’s actions.

Environmental information is important to environmentally-related activities (Nzama et al. 2022). Previous research has shown that value statements have a positive impact on organizations (Akinyele et al., 2020; Kachelmeier et al., 2016). Kachelmeier et al. (2016) show that the existence of value statements that prioritize quality improvement leads employees to shift from more efficient actions to less optimal actions, even though they are more aligned with the prioritized goals. Akinyele et al. (2020) expand on these results by showing that the behavioral effect of value statements occurs not only when the value being communicated has a narrow focus on improving quality, but also when it has a broad focus on organizational ownership. Furthermore, Aguiar (2021) shows that value statements that focus on environmental issues encourage individual intentions to follow environmentally friendly behavior. This study suggests that a value statement that focuses on the environment will encourage managers to make CSR decisions. Based on the reasoning above, the following hypothesis is proposed:

Ha2: Environmental-based value statements encourage CSR decisions more than financial-based value statements.

4.3. Incentives, value statements, and CSR decisions

Social norms dictate that individuals are expected to exhibit specific behaviors that are deemed acceptable while refraining from engaging in behaviors that are considered unacceptable. Moreover, social norms frequently serve as influential factors in shaping behavior within certain circumstances, often requiring deliberate activation. The process of activation, in many instances, occurs without conscious awareness. Once a norm has been activated, individuals tend to persist in adhering to the primed norm (Biel & Thøgersen, 2007).

Incentive schemes are a tool to motivate individuals to carry out their duties in achieving performance. Incentives are formal controls arranged by the organization. However, organizations also need informal controls. Informal control is the implicit structure that management adopts to encourage employees to act in alignment with organizational goals (Berry et al., 2009; Bisbe & Otley, 2004). Informal control is transmitted to employees through signals such as organizational value statements (Norris & O’Dwyer, 2004). When informal controls are adopted to stimulate self-regulatory behavior among employees, management does not need to penalize or reward employees for their behavior towards these controls (Berry et al., 2009). As a result, informal controls interact with formal controls to influence behavior and decisions. It is difficult to separate the effects of formal and informal controls because informal controls may induce social norms that are inconsistent with formal controls (Norris & O’Dwyer, 2004).

Further research found an interaction between formal and informal controls (Berry et al., 2009; Malmi & Brown, 2008). In management control research using experimental methods, it is proven that communication of value statements can put social pressure on employees to comply with value statements, even though it reduces employee compensation. Individuals who perceive a strong organizational commitment to the environment show greater attachment to environmental initiatives (Ramus & Steger, 2000). In the absence of stated organizational values, individuals were found to rely on their perceptions of social norms when choosing whether to support organizational sustainability initiatives (Merriman & Sen, 2012). The results show that the incentive effect alone cannot explain project choice for groups that emphasize intangible benefits for the environment or corporate financial benefits as a guide to social norms. At the same time, incentives can predictably affect groups that do not emphasize certain social norms in their decision-making. In social decisions, there will be an interaction between incentives and organizational value statements.

Informal controls, in the form of organizational values statements, can provide social pressure by communicating organizational values even when there is no explicit action to enforce them (Berry et al., 2009). Kachelmeier et al. (2016) suggest that the choice of words becomes important in the statement of values in organizations. Contemporary value statements are generally organizational and promote ideals that foster social norms (Lynn Hannan, 2016). By activating social norms, conflicting goals can emerge by themselves, which results in getting out of control by another (Blay et al., 2018). Additionally, Aguiar (2021) showed that investigates pro-environmental values statements (informal control) as a potential indicator of pro-environmental behavior in individuals. A value statement that focuses on the economic aspect will weaken CSR decisions, but when a value statement focuses on the environment, it will increasingly encourage individuals to make CSR decisions because the value statement can activate their social norms. The concept of motivation crowding states that informal controls such as value statements can interact with the incentive system, which means that intrinsic motivation interacts with incentives to get rid of individual intrinsic motivation (Frey & Jegen, 2001). Based on the reasoning above, the following hypothesis is proposed:

Ha3: There is an interaction between the incentive scheme and the organization’s value statement in making CSR decisions.

5. Research design

This study uses an experimental method with a 2 × 2 factorial design between subjects. It follows the previous research that shows the validity of using university students as substitutes for managers in a decision-making context (Avram & Kühne, 2008; Martin & Moser, 2016; Mortensen et al., 2012; Rokhayati et al., 2021). Accordingly, participants in this study were chosen from senior accounting students at the Faculty of Economics and Business of a state university in Indonesia who had taken at least four semesters, including both management accounting and financial accounting courses, to ensure a significant understanding of investment decisions and business processes.

According to Montgomery (2013), to obtain the most accurate estimate of precision, it is recommended to have a minimum sample size of 10 or 12 participants per cell. This study employed a factorial design consisting of four cells, with a recommended minimum number of participants of 48 individuals. The final number of participants in this study is 54, satisfying the recommended requirement of the participant sample size to obtain a reliable result. Table 1 shows the number of participants in this study.

Table 1. Participants.

Description	Total
Participant who join in the experiment	60
Participant who did not pass manipulation checks	6
	54

5.1. Research variables

5.1.1. The dependent variable

The dependent variable in this study is CSR investment decisions. CSR investments include environmental, employee, and social protection initiatives (Brammer et al., 2006). This study focuses on the CSR aspect that could be measured more objectively and precisely (Derchi et al., 2021). We operationalize CSR decisions within the context of the biopesticide initiative (Aguiar, 2021).

5.1.2. The independent variable

The independent variables in this study are two independent variables. First, the types of incentives which consist of monetary incentives and recognition (Lourenço, 2016, 2020). The incentive is operationalized by manipulating the type of incentive received by participants. Participants in the financial incentive condition will get monetary incentives if they accomplish performance. Meanwhile, participants in the recognition incentive condition will receive a reward if they accomplish performance. Second, the organizational value statements, consist of two levels, namely the value statement of economic and environmental (Aguiar, 2021). The value statement is operationalized by manipulating the type of value statement applied to the company. There are two manipulations of the company value statement. First, a value statement that focuses on the environment with a statement that the company cares about environmental protection so that the company encourages actions that encourage the achievement of sustainable environmental development. Second, a value statement that focuses on the financial aspect with the statement that the company prioritizes achieving financial profits so that the company prioritizes actions that encourage the company’s financial achievements.

5.2. Experimental materials and procedures

The experimental material consists of company profiles and the role of participants as managers of well-known companies whose task is to make investment decisions to achieve company goals. The next experimental material is the manipulation of incentives which are divided into monetary and non-monetary incentives (recognition), then the experimental material for company value statements related to the financial and the environment, as well as manipulation checks and ends with decision choices.

The experimental procedure began by dividing participants randomly to get the same opportunity. The participants started by filling out an informed consent stating their willingness to become a participant in the study voluntarily. Furthermore, participants received information about the implementation during the simulation and experimental instructions asking them to be operational managers of companies. Once the participants accepted the manipulation of company value statements and incentive schemes, they were asked to make CSR investment decisions. The final stage of the experiment was to conduct a debriefing, in which the subjects explained the simulation of CSR investment decisions so that they could restore the subject’s condition to the condition before the manipulation. A cover story was provided to the participants of the experiment to enhance both internal and external validity. During the post-experiment discussion, it was found that all participants expressed their belief in the cover narrative.

5.3. Research instruments

The research instrument is described as follows.

1. Introduction

   The introduction consisted of a statement of participants’ willingness to participate in the research, the company profile, and participant assignments. This statement of willingness includes a willingness to participate in the simulation voluntarily and a statement from the researcher that participant data will be kept confidential. Participants were informed that their participation was expected to contribute to the development of knowledge and the literature. The company profile designed for this study was an agro-industry company that produces soybeans. The hypothetical company profile was also illustrated by a company image, address, and illustration of the company’s legality. Each participant was informed to hold a manager role in an agro-industry company and was responsible for making business decisions.

2. Manipulation

   Participants were informed about the production process in the first manipulation stage. The illustration was given that currently, the company only used Pesticide A in its production process, but this pesticide A caused environmental damage. The company received public backlash because it was known that the use of pesticides hurt the environment. Environmentalists were pressuring the company to combine the use of Pesticide A with Biopesticides. This intervention led to managers analyzing the use of these biopesticides.

The analysis of the price of pesticides and biopesticides was the same, but the use of biopesticides would be more frequent, hence increasing maintenance costs. The results of the analysis showed that the combination of the use of pesticides and biopesticides would cause the total production costs to increase by 3% from every 10% increase in the use of biopesticides proportionally. Additional information was that using Biopesticides could completely eliminate the total negative environmental impact of the current production process. After conducting the analysis, the manager had to make a decision. However, external parties could not observe the management decision regarding the use of pesticides and biopesticides and the amount of biopesticide that the manager decided to use.

Further manipulation was related to the types of incentives and value statements as informal-formal controls in the company. In the first manipulation, it was described that the company had a focus on achieving financial performance. Managers were required to save on production costs to increase company profits. Further, it was informed that a manager would be given monetary incentives if they achieved company goals. At this stage, it was also informed that the company’s leadership was highly enthusiastic about achieving company profits, reflected in a clear top management statement known to all managers and employees: ‘We Focus on Financial Profits’.

In the second manipulation, participants received information on recognition incentives as managers dedicated to the environment in the form of certificates and trophies. Manipulation on the company’s value described that the company focused on environmental preservation. Managers were required to carry out activities to achieve sustainable development. The top management statement for this manipulation was, ‘We Focus Care about Environmental and Sustainable Development’.

In order to validate the effectiveness of our manipulation, we designed a two-step manipulation check. After getting the manipulation, each participant was given manipulation check questions related to incentives and value statements. This was to ensure that participants understood and could internalize the manipulation. In the next stage, the participants were tasked with deciding on the use of the biopesticide, whether they strongly disagreed or strongly agreed. In the final stage, participants answered additional questions regarding the activation of self-norms related to the statement of corporate values. The entire instrument was presented with the help of Google Forms.

6. Empirical result and discussion

6.1. Participant demographics

Participants in this study were sixty (60) senior students majoring in Accounting at the Economic and Business Faculty of Jenderal Soedirman University who had taken management accounting and financial accounting subjects. Six (6) participants did not pass the manipulation, so fifty-four (54) participants progressed and participated. Table 2 shows the descriptive statistics of the research participants.

Table 2. Participant descriptive data.

CSR decisions mean
Incentive	Value statements
	Financial	Environmental	Total
Financial	4.3333 (n = 12, SD= .9847)	5.9286(n = 14; SD = 1.1411)	5.1923 (n = 26; SD = 1.3272)
Recognition	5.1429 (n = 14; SD=.8644)	6.5000 (n = 14; SD=.8548)	5.8214 (n = 28; SD = 1.0904)
Total	4.7692 (n = 26; SD = 0.9922)	6.2143 (n = 28; SD = 1.0312)	5.5186 (n = 54; SD = 1.2399)

Table 1 shows the descriptive results of CSR decisions on the type of financial incentives that have an average of 5.1923, while CSR decisions with the type of recognition incentives have an average of 5.8214. The average CSR decision when the firm value focuses on the financial is 4.7692, while the average CSR decision when the firm value focuses on the environmental is 6.2143.

6.2. Randomization test

The success of randomization was checked by analyzing the participants’ demographic information while checking whether the demographics or characteristics of the participants influence CSR decisions by ANOVA testing. This test looks at the main effects of participant demographics on CSR decisions. The results of the ANOVA test showed that all the demographic characteristics of the participants, namely gender and work experience, did not affect CSR decisions. This result is shown by the p-value above 0.05 (p > 0.05) in Table 3, so it can be concluded that participant demographics, gender, and work experience do not affect CSR decisions.

Table 3. Randomization test result.

Source	Type III sum of squares	df	Mean square	F	Sig
Corrected model	.354^a	2	.177	.111	.895
Intercept	810.833	1	810.833	509.723	.000
Gender	.344	1	.344	.216	.644
Experience	.023	1	.023	.014	.905
Error	81.127	51	1.591	–	–
Total	1726.000	54	–	–	–
Corrected total	81.481	53	–	–	–

Randomization is an approach for addressing endogeneity in experimental research (Ham et al., 2005). Experiments that have been rigorously designed (e.g. randomized controlled experiments) may effectively eliminate endogeneity, which may affect the internal validity of findings (Cook & Campbell, 1979). Experiments are more likely to establish that an independent variable has a causal impact on a dependent variable when the independent variable is directly manipulated and participants are randomly assigned to treatment and control conditions (Lonati et al., 2018).

6.3. Hypothesis testing

Hypothesis 1 examines whether recognition incentive schemes encourage CSR decisions more than financial incentives. This study suspected that CSR decisions would be higher when the incentive scheme was in the form of recognition compared to financial incentives. Tests were carried out using ANOVA. The results are in Table 4 below.

Table 4. Hypotheses test result.

Source	Type III sum of squares	df	Mean square	F	Sig
Corrected model	34.672^a	3	11.557	12.345	.000
Intercept	1612.190	1	1612.190	1722.075	.000
Incentive (I)	6.408	1	6.408	6.844	.012
Value statement (VS)	29.288	1	29.288	31.284	.000
I x VS	0.190	1	0.190	0.203	.654
Error	46.810	50	0.936	–	–
Total	1726.000	54	–	–	–
Corrected total	81.481	53	–	–	–

^a R squared =, 426 (adjusted R squared =, 391).

Our hypothesis predicts that recognition incentive schemes encourage CSR decisions more than financial incentives. The results of testing the first hypothesis show that recognition incentives encourage CSR decisions. It is shown that the average CSR decision when recognition incentives is 5.8214 while the average CSR decision making when financial incentive is 5.1923. The difference is significant at a p-value less than 0.05. The results of data testing support hypothesis 1.

Further, the second hypothesis states that the statement of environmental values will encourage CSR decisions. It is shown that the average CSR decision-making when the organizational value statement focuses on sustainability is 6.2143 while the average CSR decision when the organizational value statement focuses on financial benefits is 4.7692. The difference is significant at a p-value less than 0.05. The results of data testing support hypothesis 2.

Finally, the third hypothesis states that there is an interaction between types of incentives and organizational value statements. The ANOVA test results show that the significance value of the interaction between the types of incentives and the organizational value statement is above 0.05. The results of testing the data do not support hypothesis 3.

6.4. Supplement analysis

This study demonstrates that incentives that include the recognition and the presence of environmentally focused value statements can increase CSR decisions. Post-hoc analysis was applied in this study using Games-Howell t-statistics. Table 5 shows the findings of the post-hoc analysis.

Table 5. Analysis result of post-hoc multiple comparison (Games-Howell t-statistics).

	Mean difference	Standard error	p-value
Cell 1 and 2	0.809	0.381	0.230
Cell 1 and 3	1.595*	0.381	0.001
Cell 1 and 4	2.166*	0.381	0.000
Cell 2 and 3	0.785	0.366	0.219
Cell 2 and 4	1.595*	0.366	0.003
Cell 3 and 4	0.571	0.366	0.747

* Significant mean difference at level (1-tailed).

Cell 1 = financial incentives and financial value statement; Cell 2 = recognition incentives and financial value statement, Cell 3 = financial incentives and environmental value statement; Cell 4 = recognition incentives and environmental value statement.

The research findings show that there are significant differences in cells with different types of financial incentives and a financial value statement compared to cells with financial incentives and an environment value statement (p-value 0.05); differences between cells with financial incentives and a financial value statement compared to cells with recognition incentives and a focus on the environment (p-value 0.05); and differences between cells with recognition incentives and financial value statement compared cells with recognition incentives and environment value statement (p-value 0.05). The biggest mean difference value is noted between cells 1 and cells 4, specifically between cells with financial incentives and a financial value statement compared to cells with recognition incentives and an environmental value statement. This additional analysis shows that CSR decisions are greatest when control is provided in the recognition incentives and environment value statement. This result is consistent with the finding of Crutzen et al., (2017) those who showed that recognition incentive is effective for increasing performance and Aguiar (2021) who showed that value statement is a powerful informal control mechanism.

7. Discussion

This study has investigated the effect of control systems both formal and informal, incentive types, and organizational value statements on corporate social responsibility decisions. The importance of using formal and informal controls has been suggested by previous researchers (Crutzen et al., 2017; Maas et al., 2016; Norris & O’Dwyer, 2004). However, this research expands it by using formal and informal controls in the CSR context. The results show that recognition incentives encourage CSR decisions. More importantly, this research provides important insight into the importance of formal control in the form of non-financial incentives, recognition, which prioritizes individual activation to make CSR decisions. These results prove that formal control, namely recognition incentives, can encourage individuals to make decisions related to social and environmental issues (Crutzen et al., 2017). This result showed evidence that monetary incentives have also not always been effective in a normative context (Mehta et al., 2017).

The results of this study confirm the activation theory that the existence of incentives arranged by the organization can stimulate and activate the effort and commitment of individuals in facing their duties so that they can be motivated effectively to achieve their performance (Gardner, 1986). The results of this study also support previous studies’ results that incentive schemes can motivate employees to improve their performance (Christ et al., 2016; Libby & Lipe, 1992). Further incentives, in the form of non-financial recognition, will be more effective in encouraging social decision-making (Ashraf et al., 2014). These findings suggest that the presence of a recognition system can motivate employees to attach a high value to their company (Luthans, 2000). The company’s recognition will influence employees’ perceptions of the worth of the current objective (Montani et al., 2020). Furthermore, recognition contributes to employees’ perceptions of support from the organization, which in turn motivates them to perform better (Wayne et al., 2002).

We also found that the environmental values statement will encourage CSR decisions. This research provides evidence that informal control is effective for CSR decision-making. Individuals who accept organizational value statements that focus on environmental aspects can activate individual social norms. The results of this study support the role of organizational value statements as social norms that have a role in behavior related to social issues (Schwartz, 1973). Value statements can make individuals place organizational goals greater than their interests, according to Bicchieri’s (2005) social norm activity model. Value statements that focus on the environment can activate individual preferences to conform to these social norms to encourage managers to make CSR decisions (Blay et al., 2018). The findings of this study suggest that value statements can potentially convey societal norms to influence decisions about corporate social responsibility (CSR). Consequently, this can enhance the prominence of such norms within a specific setting (Kallgren et al., 2000). These findings indicate that environmental activities incrementally involve information regarding the environment (Nzama et al., 2022). The findings of this study indicate that the presence of value statements that focus on the environment can be a method of communication that provides signals to motivate individuals to engage in CSR decisions.

Further, the results of this study confirm previous research, which states that value statements positively impact organizations (Akinyele et al., 2020; Kachelmeier et al., 2016). More specially, when the organization has a focus on environmental issues, value statements that focus on environmental issues will encourage managers to make CSR decisions more than value statements that focus on achieving financial benefits (Aguiar, 2021). This study’s results confirm that the organization’s statement of values is important (Lynn Hannan, 2016). This finding demonstrates that when a company communicates its value statements as a cue, it can effectively strengthen and reinforce behavioral norms (Kachelmeier et al., 2016).

These findings suggest that monetary incentive schemes will result in fewer CSR decisions than recognition incentives, both when financial and environmental organization statements occur. These findings also indicate that monetary incentives reduce the chances of individuals engaging in social or charitable activities (Liu & Aaker, 2008; Vohs et al., 2006). While these interaction effects are not significant, this study shows that recognition incentives have a stronger impact on individual motivation than monetary incentives (Handgraaf et al., 2013). Additionally, this result showed that the highest CSR decision is when there are recognition incentives and environmental focus value statements. The results of this research show that the existence of value statements that focus on the environment can be a means of communication that provides signals to encourage individual behavior in making CSR decisions.

These findings suggest that organizations should consider using recognition incentives to improve employee motivation. The activation of CSR decisions requires the application of incentives that correspond with existing preferences, which may differ from the organization’s primary emphasis on monetary incentives. Furthermore, the findings suggest that organizations should consider implementing informal controls, such as value statements, that might effectively activate managers’ social norms. Whenever individuals are presented with environmental information, it will result in the prioritization of environmental-related activities. These findings illustrate the importance of managerial control in promoting firms that emphasize CSR. This implies the importance of providing formal and informal control.

8. Summary and conclusion

The current research extends previous research on formal and informal control as a package system, including specific controls that influence how other controls affect decision-making and behavior (Crutzen et al., 2017; Malmi & Brown, 2008). This study aims to examine incentive schemes and organizational value statements on CSR decisions. This study provides evidence that recognition incentives encourage managers to make CSR decisions more than monetary incentives. Furthermore, this study provides evidence that a value statement that focuses on the environment can encourage managers to make CSR decisions. The results are in line with previous research that recognition incentives effective in non-monetary incentives can improve performance, according to social research. Individual performance improves when recognition, rather than monetary incentives are provided (Ashraf et al., 2014; Handgraaf et al., 2013).

Our findings make several contributions to the literature. First, we provide evidence that recognition incentives as formal control more promote CSR decisions than monetary incentives. These results prove that monetary incentives are not always effective in prosocial decisions. Second, the result indicates that the organizational values statements, particularly implemented as part of informal control systems, can improve performance (Akinyele et al., 2020) by increasing responsibility and setting standards (Urbany, 2005). However, they did not analyze it for a more specific context, this research fills the research gap by investigating value statements in the CSR decisions. Furthermore, this research proves that environmental value statements more influence CSR decisions than financial value statements. These findings are consistent with the norm activation model, in which personal norms need to be activated to achieve social and environmental decisions (Schwartz, 1977). Third, this experimental research contributes to the theory of activation of social norms by providing empirical evidence that the existence of an incentive scheme for recognition and environmental value statements can activate individual social norms to prioritize organizational interests.

Finally, our findings of this study have critical implications for the company. The results of this research indicate the importance of combining formal and informal controls. Furthermore, companies need to implement recognition incentives to improve CSR decisions, so companies need to implement recognition incentives that are less costly than financial incentives. Next, companies need to implement the use of environmental value statements that will drive CSR decisions. This research is important in providing insight for companies that it is necessary to pay attention to aspects of personal norms in implementing comprehensive control to motivate CSR decision-making.

This study has several limitations. First, while the selection of university students as a proxy of managers has been appropriately made, the student sample may have a higher degree of homogeneity in various dimensions, including age and level of education, compared to actual managers in the workplace. Therefore, the study’s generalizability should be interpreted within context. It could be improved further by utilizing a more heterogeneous sample. So, while it has been suggested that the findings could represent the opinions of managers, further research with professional participants could confirm and strengthen the findings. The result of this experiment may differ when considering more complex organizational circumstances of pollution and environmental harm in the context of decision-making over pesticide usage in agro-industrial enterprises. Further investigation is required to explore this topic in future studies. Other factors might also influence CSR decisions within this context, including the individual aspects of the managers in making CSR decisions. Future research accommodating other potential influencing factors may be able to explain CSR decisions from different angles.

Author contributions

Hijroh Rokhayati: Conceptualization, Formal analysis, Investigation, Writing - original draft

Mahfud Sholihin: Conceptualization, Funding acquisition, Writing - review & editing

Hadrian G. Djajadikerta: Conceptualization, Supervision, Writing - review & editing.

Ethics approval

We declare that the principles of ethical and professional conduct have been followed and all participants have read and signed the informed consent before participating in this research.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The participants of this study did not give written consent for their data to be shared publicly, so due to the sensitive nature of the research supporting data is not available.

Additional information

Funding

This study is funded by Post-Doctoral Research Grant from Gadjah Mada University, contract number 13602/UN1.P.II/Dit-Lit/PT.01.04/2022.

Notes on contributors

Hijroh Rokhayati

Hijroh Rokhayati is a lecturer at Department of Accounting, Faculty of Economics and Business, Universitas Jenderal Soedirman, Indonesia. Her research interests include management accounting, behavioral accounting, corporate social responsibility, and business ethics.

Mahfud Sholihin

Mahfud Sholihin is a professor at Department of Accounting, Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia. His research interests and subjects include management accounting, islamic accounting, and business and accounting profession ethics.

Hadrian Geri Djajadikerta

Hadrian Geri Djajadikerta is a professor of Accounting Discipline in the School of Accounting, Economics and Finance at Curtin University. His research area covers essential aspects of sustainability, corporate governance and management accounting, including the application of sustainability and sustainable development principles to organisations and their reporting. He also carries out interdisciplinary research in the field of sustainability and sustainable development with the coverage areas of management, finance, supply chain and logistics, digital technology, and education.