Executive Compensation with Environmental and Social Performance 

68 Pages Posted: 2 Feb 2023 Last revised: 1 Mar 2025

See all articles by Pierre Chaigneau

Pierre Chaigneau

Queen's University; Queen’s University; European Corporate Governance Institute (ECGI)

Nicolas Sahuguet

HEC Montreal - Institute of Applied Economics

Date Written: June 01, 2024

Abstract

How can managers be incentivized to create both financial and social value? Since managers can anticipate how their decisions impact social performance metrics, they may game a compensation scheme based on these measures. Nevertheless, the optimal compensation contract still incorporates social performance metrics when the board’s preferred level of social investment exceeds the level that maximizes the stock price. In this case, gaming distorts social investments, and the sensitivity of pay to social performance is reduced to mitigate this effect. When multiple independent social performance measures are available, the inefficiencies caused by gaming can be alleviated. Our findings suggest that efforts to harmonize social performance measurement may have unintended negative consequences.

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

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JEL Classification: G30, M12

Suggested Citation

Chaigneau, Pierre and Sahuguet, Nicolas, Executive Compensation with Environmental and Social Performance  (June 01, 2024). European Corporate Governance Institute – Finance Working Paper No. 1035/2025, Review of Finance, accepted for publication, Available at SSRN: https://ssrn.com/abstract=4345102 or http://dx.doi.org/10.2139/ssrn.4345102

Pierre Chaigneau (Contact Author)

Queen's University ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Queen’s University ( email )

European Corporate Governance Institute (ECGI)

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

Nicolas Sahuguet

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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