Ceo's Long-Term Incentive Plan Compensation and the Adoption of Double Materiality for ESG Reporting: Evidence from the U.K

Abstract

This study investigates the relationship between chief executive officers’ (CEOs) long-term incentive plan (LTIP) compensation and their firms’ adoption of double materiality. Firms design LTIP compensation to align the interests of CEOs with those of shareholders. We argue that LTIP can increase the likelihood that firms adopt double materiality to enhance their reporting of ESG activities to broader stakeholders. Using manually collected data from a sample of firms with ESG disclosures in the United Kingdom, we find a positive and significant association between CEOs’ LTIP and the likelihood of firms adopting double materiality. This relationship is stronger for firms in high-carbon industries and for firms with increased CEO pay-performance sensitivity. We further report that CEOs’ LTIP increases the volume and net positive tone of firms’ ESG disclosures. This study contributes to the literatures on LTIP and on double materiality.

Keywords: Double materiality, financial materiality, impact materiality, ESG, long-term incentive plan, executive compensation, chief executive officer.