ESG-linked compensation, CEO skills, and shareholder welfare
ESG-linked compensation, CEO skills, and shareholder welfare
Executive compensation is increasingly being linked to ESG outcomes. This paper examines whether ESG targets are consistent with shareholder welfare. Using granular information on compensation contracts of Swedish CEOs, we show that ESG and financial targets are competing. ESG-linked compensation is 5 percentage points more common in well-governed firms and 6.3 percentage points more likely for CEOs with broader skill sets (generalist CEOs). ESG scores of well-governed firms improve when generalist CEOs have ESG-linked pay, but there is no effect on profitability. These results suggest that boards set ESG contracts because shareholders derive utility from ESG in addition to wealth, and ESG may not be produced without these incentives. (JEL M14, G14, D21, L21) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
939-985
Homroy, Swarnodeep
bf9526ca-76e9-4d1f-8b8e-0be867b684f1
Mavruk, Taylan
5ba83f6a-c886-4fab-a2b9-8f23c40330cb
Nguyen, Van Diem
217f0265-fbce-4a6d-a156-a44a72b43fef
30 May 2023
Homroy, Swarnodeep
bf9526ca-76e9-4d1f-8b8e-0be867b684f1
Mavruk, Taylan
5ba83f6a-c886-4fab-a2b9-8f23c40330cb
Nguyen, Van Diem
217f0265-fbce-4a6d-a156-a44a72b43fef
Homroy, Swarnodeep, Mavruk, Taylan and Nguyen, Van Diem
(2023)
ESG-linked compensation, CEO skills, and shareholder welfare.
Review of Corporate Finance Studies, 12 (4), .
(doi:10.1093/rcfs/cfad012).
Abstract
Executive compensation is increasingly being linked to ESG outcomes. This paper examines whether ESG targets are consistent with shareholder welfare. Using granular information on compensation contracts of Swedish CEOs, we show that ESG and financial targets are competing. ESG-linked compensation is 5 percentage points more common in well-governed firms and 6.3 percentage points more likely for CEOs with broader skill sets (generalist CEOs). ESG scores of well-governed firms improve when generalist CEOs have ESG-linked pay, but there is no effect on profitability. These results suggest that boards set ESG contracts because shareholders derive utility from ESG in addition to wealth, and ESG may not be produced without these incentives. (JEL M14, G14, D21, L21) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
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strategic-ceo-activism-in-polarized-markets
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e-pub ahead of print date: 15 May 2023
Published date: 30 May 2023
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Local EPrints ID: 499360
URI: http://eprints.soton.ac.uk/id/eprint/499360
PURE UUID: 02c3d7b1-d7c5-425b-ada2-891d2cde803e
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Date deposited: 18 Mar 2025 17:30
Last modified: 22 Aug 2025 02:47
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Author:
Swarnodeep Homroy
Author:
Taylan Mavruk
Author:
Van Diem Nguyen
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