Are ESG performance-based incentives a panacea or a smokescreen for excess compensation?
Sustainability Accounting, Management and Policy Journal
ISSN: 2040-8021
Article publication date: 8 June 2023
Issue publication date: 27 June 2023
Abstract
Purpose
This paper aims to examine how the use of environmental, social and governance (ESG) incentives intersects with top management power and various corporate governance mechanisms to affect excess annual cash bonus compensation.
Design/methodology/approach
The authors use a novel artificial intelligence (AI) technique to obtain data about ESG incentives use by firms in the S&P 500. The authors test the hypotheses with an endogenous treatment-regression and a contrast test.
Findings
When the top management team has power and uses ESG incentives, there is a 32% reduction in excess annual cash bonuses implying ESG incentives are an effective corporate governance tool. However, nuanced analyses reveal that when powerful management teams with ESG incentives are from environmentally sensitive industries, have a corporate social responsibility (CSR) committee or have long-term view institutional shareholders, they derive excess bonuses.
Practical implications
Stakeholders will better understand management’s motivations for the inclusion of ESG incentives in executive compensation contracts and be able to identify situations which require closer scrutiny.
Social implications
Given the increased popularity of ESG incentives, society, regulators, boards of directors and management teams will be interested in better understanding when these incentives might be effective and when they might be abused.
Originality/value
To the best of the authors’ knowledge, this study is the first to examine the use of ESG incentives in relation to excess pay. The authors contribute to both the CSR and executive compensation literatures. The work also uses a new methodological technique using AI to gather difficult-to-obtain data, opening new avenues for research.
Keywords
Acknowledgements
The authors wish to thank Ehsan Debiran and Mark Anthony De Luca for their helpful research assistance. Thanks are also expressed to Thomas Schneider, Denis Cormier, Emilio Boulianne and Bryan Campbell for their valuable comments. Comments from the participants of the 2020 CAAA conference and 2021 CSEAR webinar have also been much appreciated. The authors also thank Jeff Meyer from The Analysis Factor for his feedback and consultation on our econometric models. The authors thank Julien Priour and the team at Blees AI for their support of this project. Finally, the authors thank two anonymous reviewers for their valuable comments and feedback.
Compliance with ethical standards: This research was supported by the Fonds de recherche Société et Culture (FRQSC), a Bertram Scholarship from the Canadian Foundation for Governance Research (CFGR), the Stephen A. Jarislowsky Chair in Corporate Governance and the Institute for Governance of Private and Public Organizations (IGOPP). The authors have no competing interests to declare that are relevant to the content of this paper. All authors contributed to the study conception and design. Material preparation, data collection and analysis were performed by S. Leanne Keddie. The first draft of the manuscript was written by S. Leanne Keddie and Michel Magnan, and all authors commented on previous versions of the manuscript. All authors read and approved the final manuscript.
Citation
Keddie, S.L. and Magnan, M. (2023), "Are ESG performance-based incentives a panacea or a smokescreen for excess compensation?", Sustainability Accounting, Management and Policy Journal, Vol. 14 No. 3, pp. 591-634. https://doi.org/10.1108/SAMPJ-11-2022-0605
Publisher
:Emerald Publishing Limited
Copyright © 2023, Emerald Publishing Limited