Executive Compensation Tied to ESG Performance: International Evidence

69 Pages Posted: 2 May 2022 Last revised: 17 Apr 2023

See all articles by Shira Cohen

Shira Cohen

San Diego State University

Igor Kadach

University of Navarra, IESE Business School

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Stefan Reichelstein

University of Mannheim - Business School; University of Mannheim - Mannheim Institute for Sustainable Energy Studies; ZEW – Leibniz Centre for European Economic Research; Stanford Graduate School of Business

Multiple version iconThere are 5 versions of this paper

Date Written: March 1, 2023

Abstract

Using a wide sample of international publicly traded firms, this paper studies the rapidly increasing practice of incorporating ESG metrics in executive compensation contracts. Our evidence suggests that this compensation practice varies at the country, industry, and firm level in ways that are consistent with efficient incentive contracting. We also observe that reliance on ESG metrics in executive compensation arrangements is associated with engagement, voting, and trading by institutional investors, which suggests that firms could be adopting this practice to align their management’s objectives with the preferences of certain shareholder groups. Finally, we find that the adoption of ESG Pay is accompanied by improvements in key ESG outcomes, but not by improvements in financial performance.

Keywords: ESG metrics, Executive compensation, Institutional ownership

JEL Classification: M12, M41, Q54

Suggested Citation

Cohen, Shira and Kadach, Igor and Ormazabal, Gaizka and Reichelstein, Stefan, Executive Compensation Tied to ESG Performance: International Evidence (March 1, 2023). European Corporate Governance Institute – Finance Working Paper No. 825/2022, Journal of Accounting Research, forthcoming, Available at SSRN: https://ssrn.com/abstract=4097202 or http://dx.doi.org/10.2139/ssrn.4097202

Shira Cohen

San Diego State University ( email )

San Diego, CA 92182-0763
United States

Igor Kadach

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Gaizka Ormazabal (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stefan Reichelstein

University of Mannheim - Business School ( email )

University of Mannheim - Mannheim Institute for Sustainable Energy Studies ( email )

Mannheim
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

Stanford Graduate School of Business ( email )

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