Sustainability and Executive Compensation

Over the last few decades, executive pay has undergone several major reinterpretations, which have affected both its design and regulation. Our chapter provides an overview of the trajectory of executive pay, including the recent trend toward integration of sustainability and ESG targets in compensation packages.

Our chapter also provides empirical evidence as to the prevalence of ESG-linked executive pay in public listed companies. Analysing a sample of 8.649 publicly traded firms covering 58 countries in the period 2002-2021, we show that a growing number of listed firms include drivers involving sustainable performance in their executive remuneration packages. However, we identify notable differences associated with sector and country characteristics in this regard. For example, we find that, in countries with better government features, firms are more likely to adopt ESG-linked compensation.

Overall, our empirical analysis presents a mixed picture. Some of our findings could be consistent with the idea that ESG-linked compensation exacerbates the agency problem of executive pay. We cannot, however, rule out the possibility that such compensation provides a powerful incentive towards more sustainable corporate practices in the future.