The Review of Corporate Finance Studies Vol. 12 No. 4 2023
ESG-Linked Compensation, CEO Skills, and Shareholder Welfare
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.
- DOI
- 10.1093/rcfs/cfad012
- Volume
- 12
- Issue
- 4
- Pages
- 939-985
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref