Executive Compensation With Socially Responsible Shareholders

50 Pages Posted: 2 Feb 2023 Last revised: 30 Nov 2023

See all articles by Pierre Chaigneau

Pierre Chaigneau

Queen's University; Queen’s University

Nicolas Sahuguet

HEC Montreal - Institute of Applied Economics

Date Written: November 2023


We study incentive provision by a socially responsible board. We show that managerial compensation uses measures of social performance such as ESG scores only when the board is more socially responsible than investors who set the stock price. Thus, ESG-based compensation and socially responsible investors are substitutes. When the board and investors have different social preferences, the compensation contract uses multiple performance measures. Otherwise, it only relies on the stock price. The firm's manager, who understands how social performance measures are constructed, will game the methodologies. Relying on multiple measures based on different methodologies can mitigate this inefficiency. This has normative implications for the regulation and harmonization of ESG ratings.

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

JEL Classification: G30, M12

Suggested Citation

Chaigneau, Pierre and Sahuguet, Nicolas, Executive Compensation With Socially Responsible Shareholders (November 2023). 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

Queen’s University ( email )

Nicolas Sahuguet

HEC Montreal - Institute of Applied Economics ( email )

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

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