Does adopting voluntary ESG practices affect executive compensation?

Abudy, Menachem; Gavious, Ilanit; Shust, Efrat

doi:10.1016/j.intfin.2022.101718

Cited by 7 publications

(9 citation statements)

References 26 publications

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“…More recently, Abudy et al (2023) have examined a sample of bank firms from several countries and found that total compensation increases for banks that adopt the Equator Principles (EP), a voluntary framework of environmental guidelines in financing [2]. While their study has focused on the adoption of environmental initiatives across several countries, we examine the effect of composite ESG ratings on executive pay in U.S. financial firms.…”

Section: Literature Review and Research Hypotheses 11 Direct Associat...mentioning

confidence: 99%

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Managerial incentives for ESG in the financial services industry: direct and indirect association between ESG and executive compensation

Lee,

Koh,

Shim

2023

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PurposeThis study investigates the empirical association between environmental, social and corporate governance (ESG) performance and top executive compensation in the US financial services industry. Considering that financial firms can inflict systemic shocks across the economy, it has been argued that they must conduct ethical and sustainable business in accordance with ESG principles. This study examines whether ESG efforts are beneficial to managers.Design/methodology/approachThe authors use CEO compensation and ESG performance ratings data for all US financial firms (SIC 6000–6799) from 2015 to 2019. Employing fixed effects regressions, the authors test whether lagged ESG performance is related to CEO compensation, after controlling for other firm characteristics such as size, financial performance, leverage and CEO stock ownership.FindingsThe authors find that lagged ESG ratings are strongly associated with all forms of compensation. An increase of one standard deviation in the composite ESG rating is associated with a 14%–16% increase in the total pay. Among the three ESG pillars, only S (social) and G (governance) exhibit persistent and significant associations with both short- and long-term executive pay. The authors also document the significant moderating effects of ESG on the relationships among firm performance, size, leverage, ownership and executive pay, identifying how ESG is associated with compensation.Originality/valueThe authors conclude that managers receive ESG incentives implicitly and explicitly. The novel finding of direct and indirect associations between ESG and top executive compensation contributes to the growing ESG literature on the financial sector and ongoing debate about the explicit inclusion of ESG targets in compensation design.

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Section: Literature Review and Research Hypotheses 11 Direct Associat...mentioning

confidence: 99%

“…More recently, Abudy et al. (2023) have examined a sample of bank firms from several countries and found that total compensation increases for banks that adopt the Equator Principles (EP), a voluntary framework of environmental guidelines in financing [2].…”

Section: Literature Review and Research Hypothesesmentioning

confidence: 99%

Managerial incentives for ESG in the financial services industry: direct and indirect association between ESG and executive compensation

Lee,

Koh,

Shim

2023

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“…3.1.1 The dependent variable. COMP is the variable for CEO compensation, which represents equity-based compensation (COMP-EQUITY) and cash-based compensation (COMP-CASH) (Abudy et al, 2023). COMP-EQUITY is calculated as the ratio of equity-based compensation (the sum of options and restricted stocks) to the total compensation (Choi and Suh, 2019).…”

Section: Model and Variables Understudy For Hypothesis Testingmentioning

confidence: 99%

“…Equity-based compensation addresses the long-term consequences of managers' actions (Baber et al ., 1998) and lengthens managers' decision horizon and motivates them to focus more on activities that increase value in the long-term (Jensen and Murphy, 1990). Moreover, it provides more incentives for managers to invest effort in maintaining their current performance levels (Abudy et al ., 2023). This incentive extends managers' decision horizons to facilitate long-run decisions aligned with shareholder interests (Dechow and Sloan, 1991) and induces managerial efforts to maximize firms' long-term value (Zhou, 2001).…”

Section: Literature Review and Hypothesis Formulationmentioning

confidence: 99%

The impact of accounting comparability on CEO incentive plans in an emerging economy: the moderating role of board independence

Arianpoor,

Efazati

2023

ARA

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PurposeThe present study investigates the impact of accounting comparability on chief executive officer (CEO) incentive plans and the moderating role of board independence for companies listed in Tehran Stock Exchange (TSE).Design/methodology/approachThe information about 177 companies in 2014–2021 was examined. In this study, equity-based compensation and cash-based compensation were used as the CEO incentive plans. The equity-based compensation was calculated through the ownership of the CEO shares.FindingsThe results suggest that the higher accounting comparability increases not only CEO equity-based compensation, but also cash-based compensation. Board independence also strengthens the relationship between accounting comparability and CEO compensation. Hypothesis testing based on robustness checks confirmed these results.Originality/valueThe paper is pioneering, to the authors' knowledge, in identifying how board independence moderates the impact of accounting comparability on CEO compensation. The findings provide insights into economic consequences to the firm related to accounting comparability and board monitoring. The results have important practical implications for international investors to evaluate accounting comparability, corporate governance mechanisms and CEO incentives.

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“…Furthermore, remuneration contracts are drawn up in such a way as to allow the extraction of executive annuities. The adoption of an ESG policy leads to a compensation structure that improves the alignment of the interests of managers and shareholders, thereby influencing performance (Abudy et al , 2022).…”

Section: Introductionmentioning

confidence: 99%

Mediating effect of ESG performance on executive incentive compensation-financial performance relationship: evidence from MENA banking sector

Ben Ali,

Chouaibi

2023

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Purpose This study aims to investigate whether integrating environmental, social and governance (ESG) practices mediates the relationship between executive incentive compensation and the financial performance of Islamic and conventional banks in the Middle East and North Africa (MENA) region. Design/methodology/approach This study used multiple regression models to analyze the effectiveness of ESG practices as a mediating variable in explaining the relationship between executive incentive compensation and banks’ financial performance between 2015 and 2021. The sample consisted of 57 Islamic and conventional banks operating in the MENA region, and the data were collected from the Thomson Reuters database (Data Stream). Findings This research paper showed the positive and significant mediating effect of the ESG practice on Banks’ financial performance. Thus, banks’ financial and stock market profitability is influenced by ESG information disclosure. This finding shows that taking ESG into account improves the relationship between executive incentive compensation and banks’ financial performance. Practical implications The results may interest academic researchers, regulators and policymakers and would support stakeholders and decision-makers who wish to discover how executive incentive compensation affects financial performance in banks. Originality/value This study contributes to previous literature by studying the mediating effect of ESG practices on the relationship between executive incentive compensation and banks’ financial performance. Indeed, the originality of this research paper is justified by the scarcity of studies and, to the best of the authors’ knowledge, constitutes one of the first attempts to examine this relationship via a mediating variable, i.e. ESG.

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Does adopting voluntary ESG practices affect executive compensation?

Cited by 7 publications

References 26 publications

Managerial incentives for ESG in the financial services industry: direct and indirect association between ESG and executive compensation

Managerial incentives for ESG in the financial services industry: direct and indirect association between ESG and executive compensation

The impact of accounting comparability on CEO incentive plans in an emerging economy: the moderating role of board independence

Mediating effect of ESG performance on executive incentive compensation-financial performance relationship: evidence from MENA banking sector

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