Working Paper: CEPR ID: DP17267
Authors: Gaizka Ormazabal; Shira Cohen; Igor Kadach; Stefan Reichelstein
Abstract: This paper examines the use of ESG performance metrics in executive compensation contracts. We first document that a growing fraction of publicly traded companies around the world now incorporate ESG metrics in the compensation schemes of their top executives. Our analysis links the reliance on these metrics to firm fundamentals, the geographic location of firms as well as the influence of institutional shareholders. Our findings also suggest that the adoption of ESG variables in managerial performance measures is accompanied by improvements in ESG performance and meaningful changes in the compensation of executives.
Keywords: ESG metrics; Executive compensation; Institutional ownership
JEL Codes: M12; M41; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional investors' engagements (G23) | probability of firms adopting ESG metrics in compensation contracts (M12) |
| Adoption of ESG metrics in executive compensation contracts (M12) | improvements in ESG performance (O44) |
| Higher ESG ratings and lower CO2 emissions (Q52) | higher variable compensation for executives (M12) |
| ESG pay (J33) | shareholder wealth (G34) |
| ESG pay (J33) | stock returns (G12) |
| Institutional ownership (G32) | likelihood of firms adopting ESG pay (Q52) |