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Executive Compensation Tied to ESG Performance: International Evidence

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  • SHIRA COHEN
  • IGOR KADACH
  • GAIZKA ORMAZABAL
  • STEFAN REICHELSTEIN

Abstract

Using a wide sample of international publicly traded firms, this paper studies the rapidly increasing practice of incorporating Environmental, Social, and Governance (ESG) metrics in executive compensation contracts. Our evidence suggests that this compensation practice varies at the country, industry, and firm levels in ways that are consistent with efficient incentive contracting. We also observe that reliance on ESG metrics in executive compensation arrangements is associated with engagement, voting, and trading by institutional investors, which suggests that firms could be adopting this practice to align their management's objectives with the preferences of certain shareholder groups. Finally, we find that the adoption of ESG Pay is accompanied by improvements in key ESG outcomes, but not by improvements in financial performance.

Suggested Citation

  • Shira Cohen & Igor Kadach & Gaizka Ormazabal & Stefan Reichelstein, 2023. "Executive Compensation Tied to ESG Performance: International Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 61(3), pages 805-853, June.
    • Handle: RePEc:bla:joares:v:61:y:2023:i:3:p:805-853
    DOI: 10.1111/1475-679X.12481
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    2. Zeng, Yongliang & Zhao, Xiangfang & Zhu, Yiwen, 2023. "Equity incentives and ESG performance: Evidence from China," Finance Research Letters, Elsevier, vol. 58(PC).
    3. Ann Susan Thomas & Ambili Jayachandran & Ajithakumari Vijayappan Nair Biju, 2024. "Strategic mapping of the environmental social governance landscape in finance – A bibliometric exploration through concepts and themes," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 4428-4453, September.
    4. Li Wang & Hongyu Yang, 2024. "Digital technology innovation and corporate ESG performance: evidence from China," Economic Change and Restructuring, Springer, vol. 57(6), pages 1-32, December.
    5. Giulio Cornelli & Magdalena Erdem & Egon Zakrajsek, 2024. "CEO turnover risk and firm environmental performance," BIS Working Papers 1190, Bank for International Settlements.
    6. Zhang, Yanan & Zhang, Xiaoyu, 2024. "Top management team functional diversity and ESG performance," Finance Research Letters, Elsevier, vol. 63(C).
    7. Zhang, Yuqian & Yang, Zhaojun, 2024. "Dynamic incentive contracts for ESG investing," Journal of Corporate Finance, Elsevier, vol. 87(C).
    8. Liu, Simeng & Wang, Kun Tracy & Walpola, Sonali & Zhu, Nathan Zhenghang, 2024. "CSR contracting and stock price crash risk: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    9. Yin, Zhichao & Li, Xinqi & Si, Dengkui & Li, Xiaolin, 2023. "China stock market liberalization and company ESG performance: The mediating effect of investor attention," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1396-1414.
    10. Ampedu Raphael & Antwi Agyei Bright & Mang'ati Frank Peter & Boadi Joana Ankobea & Boakye Boateng Gifty & Nunoo Linda Ofeibea & Mensah Cornelius Nii Odoi & Mensah Richmond, 2024. "An Empirical Study on the Influence of ESG Ratings on Earnings Management among Listed Companies in China," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(8), pages 3678-3693, August.
    11. Zhie Wang & Xiaoyong Wang & Xuexin Liu & Jun Zhang & Jingde Xu & Jun Ma, 2024. "A Novel Stacked Generalization Ensemble-Based Hybrid SGM-BRR Model for ESG Score Prediction," Sustainability, MDPI, vol. 16(16), pages 1-25, August.
    12. Cheng Peng & Yuansheng Chen, 2024. "Informal board hierarchy and corporate ESG performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 4783-4795, September.
    13. Wang, Jiaxin & Cheng, Ruonan & Huang, Yong & Yan, Chao, 2023. "The pre-IPO dividend and IPO underpricing: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    14. Bai, Chengyu & Liu, Dan & Liu, Yong, 2024. "Executive team restructuring and corporate ESG disclosure quality," Finance Research Letters, Elsevier, vol. 66(C).

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