Executive Compensation with Environmental and Social Performance
European Corporate Governance Institute – Finance Working Paper No. 1035/2025
Review of Finance, accepted for publication
68 Pages Posted: 2 Feb 2023 Last revised: 1 Mar 2025
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: 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
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- Abstract Views: 2695
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- Captures
- Readers: 12
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- Blog Mentions: 1
- News Mentions: 1
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