Article2023

Are ESG performance-based incentives a panacea or a smokescreen for excess compensation?

45 citations0/0 files storedSustainability Accounting Management and Policy Journal

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Corporate Social Responsibility Reporting Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose This paper aims to examine how the use of environmental, social and governance (ESG) incentives intersects with top management power and various corporate governance mechanisms to affect excess annual cash bonus compensation. Design/methodology/approach The authors use a novel artificial intelligence (AI) technique to obtain data about ESG incentives use by firms in the S&P 500. The authors test the hypotheses with an endogenous treatment-regression and a contrast test. Findings When the top management team has power and uses ESG incentives, there is a 32% reduction in excess annual cash bonuses implying ESG incentives are an effective corporate governance tool. However, nuanced analyses reveal that when powerful management teams with ESG incentives are from environmentally sensitive industries, have a corporate social responsibility (CSR) committee or have long-term view institutional shareholders, they derive excess bonuses. Practical implications Stakeholders will better understand management’s motivations for the inclusion of ESG incentives in executive compensation contracts and be able to identify situations which require closer scrutiny. Social implications Given the increased popularity of ESG incentives, society, regulators, boards of directors and management teams will be interested in better understanding when these incentives might be effective and when they might be abused. Originality/value To the best of the authors’ knowledge, this study is the first to examine the use of ESG incentives in relation to excess pay. The authors contribute to both the CSR and executive compensation literatures. The work also uses a new methodological technique using AI to gather difficult-to-obtain data, opening new avenues for research.

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References

2006Incentives and Prosocial Behavior 2009Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially 2015Organized hypocrisy, organizational façades, and sustainability reporting 2007The power of the pen and executive compensation 2003Executive Equity Compensation and Incentives: A Survey 2019Corporate governance and the rise of integrating corporate social responsibility criteria in executive compensation: Effectiveness and implications for firm outcomes 2004An investigation of the effect of Balanced Scorecard implementation on financial performance 2012Do actions speak louder than words? An empirical investigation of corporate environmental reputation

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