Executive Compensation with Social and Environmental Performance 

Abstract

How to incentivize a manager to create value and be socially responsible? A manager can predict how his decisions will affect measures of social performance, and will therefore game an incentive system that relies on these measures. Still, we show that the compensation contract is based on measures of social performance when the level of social investments preferred by the board exceeds the one that maximizes the stock price. In this case, because of gaming, social investments are distorted and the sensitivity of pay to social performance is reduced. Relying on multiple measures based on different methodologies will generally mitigate inefficiencies due to gaming, i.e. harmonization of social performance measurement can backfire.

Keywords: corporate governance, corporate social responsibility, ESG measurement, ESG harmonization, executive compensation

JEL Classification: G30, M12