Executive Compensation, Sustainability, and Performance of European and US Banks

Abstract

This study aims to investigate the impact of sustainability and executive compensation on bank's performance before and after the 2007-2009 financial crisis of 127 banks in Europe and the USA from 2002 to 2019 with a total of 2286 observations using the PLS-SEM approach. It also investigates the direct impact of executive compensation on sustainability (measured by ESG score). Additionally, this study examines the mediating role of sustainability between executive compensation and bank's performance. The results reveal a positive impact of executive compensation on sustainability and performance dimensions, and mixed results for the impact of sustainability factors on performance. Further, there is a partial mediation role for ESG score on the effect of compensation on performance, and mixed findings for the individual pillars. Furthermore, different results were found before and after the crisis as well as between Europe and the USA banks for the diverse relationships. Above all, the environmental pillar is indicated to be the lowest impacting pillar. The results can contribute to changing the compensation setup in the banking sector, and have important implications for bank practitioners, decision-makers, regulators, auditors, professional firms, and policymakers.