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9 - Sustainability and Executive Compensation

from Part II - Ethics and Sustainability in Corporate Law, Corporate Governance and Conduct

Published online by Cambridge University Press:  30 January 2025

By
Roberto Barontini  and
Jennifer Hill
Edited by
Kern Alexander ,
Matteo Gargantini  and
Michele Siri
Kern Alexander
Affiliation:
University of Zurich
Matteo Gargantini
Affiliation:
University of Genoa
Michele Siri
Affiliation:
University of Genoa
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Summary

Over the last few decades, executive pay has undergone several major reinterpretations, which have affected both its design and regulation.Our chapter provides an overview of the trajectory of executive pay,including the recent trend toward integration of sustainability and ESG targets in compensation packages.Our chapter also provides empirical evidence as to the prevalence of ESG-linked executive pay in public listed companies. Analysing a sample of 8,649 publicly traded firms covering 58 countries in the period 2002–2021, we show that a growing number of listed firms include drivers involving sustainable performance in their executive remuneration packages. However, we identify notable differences associated with sector and country characteristics in this regard. For example, we find that, in countries with better government features, firms are more likely to adopt ESG-linked compensation.Overall, our empirical analysis presents a mixed picture. Some of our findings could be consistent with the idea that ESG-linked compensation exacerbates the agency problem of executive pay. We cannot, however, rule out the possibility that such compensation provides a powerful incentive towards more sustainable corporate practices in the future.

Keywords

executives’ remunerationperformance-based compensationagency problemssay-on-pay votepay for sustainable performancesay on climate initiativesshareholder welfare maximisationmacro-determinants of ESG compensation
Type
Chapter
Information
The Cambridge Handbook of EU Sustainable Finance
Regulation, Supervision and Governance
 , pp. 214 - 248
Publisher: Cambridge University Press
Print publication year: 2025

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