Does explicit contracting effectively link CEO compensation to environmental performance?

Abstract

Empirical research in the area of corporate sustainability highlights potential confl icts between corporate fi nancial performance and environmental performance. In such a situation, agency theory arguments applied to the corporate environmental context predict that top management compensation should be explicitly linked to environmental performance in order to bring about proper alignment of organizational environmental goals and management incentives. We test this proposition for a sample of 207 Standard & Poor 500 fi rms in the US in 1996 who explicitly report in Investor Responsibility Research Council (IRRC) surveys the presence or absence of a contractual link between environmental performance and executive compensation. We fi nd that only in fi rms with an explicit linkage between environmental performance and executive contracts is there is any evidence of a signifi cant impact of fi rm-level environmental performance on CEO compensation levels. However, even this impact is not very impressive since (a) it holds only for IRRC compliance and spill indices and does not hold for IRRC toxic emission indices, and (b) even the effects for compliance and spill indices do not hold relative to industry levels of these indices.

CEO Compensation and Sustainability Reporting Assurance: Evidence from the UK

“…This paper extends studies examining social performance as a determinant of CEO pay (e.g. Riahi-Belkaoui 1992; Cordeiro and Sarkis 2008;Cai et al 2011;Francoeur et al 2017) and focuses on the impact of sustainability assurance and the existence of board-level sustainability committees on CEO compensation. The voluntary external assurance of sustainability reports can enhance their reliability and credibility and mitigate management camouflaging sustainability issues (Bebchuk and Fried 2003;Brown-Liburd and Zamora 2014;Cohen and Simnett 2014;Eccles et al 2014;Wong and Millington 2014).…”

“…Studies such as McGuire et al (2003) find no significant relationship between incentives and firm social performance, and Benson and Davidson (2010) find that improved stakeholder management does not result in additional CEO compensation. Cordeiro and Sarkis (2008) test whether there is an explicit linkage between executive compensation and environmental performance and find partial evidence of a linkage and suggest that it is likely that US companies utilise the linkage between top executive compensation and environmental performance as a management communication strategy to maintain their standing with stakeholders. Berrone and Gomez-Mejia (2009a) examine the association between pollution reduction programs and CEO compensation and find that only environmental practices that have the potential to improve future firm performance are rewarded.…”

“…Previous literature suggests that companies should provide CEOs with explicit incentives in their compensation package if they want to increase their environmental commitment Stanwick 2001, 2003;Cordeiro and Sarkis 2008;Berrone and Gomez-Mejia 2009a). According to stakeholder theory, compensation committees will respond to pressures from stakeholders including environmental activist and social investment funds by explicitly using social targets in CEO compensation (Maas 2015).…”

Sustainable Bonuses: Sign of Corporate Responsibility or Window Dressing?

“…In line with the literature on executive compensation, they find that financial performance is positively related to social performance regardless of the compensation measure employed, but that the two measures of remuneration have opposing effects on social performance. A study by Cordeiro and Sarkis (2008) of 207 US firms from the Standard & Poor 500 finds that only in firms with an explicit linkage between environmental performance and executive contracts is there evidence for an impact of environmental performance on CEO compensation levels.…”

“…Hence, in our analysis we will consider two core properties of performance measures that are examined in previous studies on environmental management (cf. Berrone and Gomez-Mejia, 2009b;Cordeiro and Sarkis, 2008;Lothe et al, 1999, Lothe andMyrtveit, 2003) and management control/Balanced Scorecard (cf. Luft, 2009;Perego and Hartmann, 2009).…”