Environmental Performance Linked to CEO Pay
This study investigated the link between compensation and environmental performance across high-polluting industries in the U.S. authors found environmental performance and CEO pay were positively related, and pollution prevention was valued more than pollution control. Companies can support corporate environmental initiatives and create social benefits by linking executive compensation to environmental performance.
Companies often respond to pressure from government, media and other groups by employing strategies to promote environmental performance. Strong environmental performance can make the company more accepted in the eyes of stakeholders; this in turn can lower liability, improve reputation and relations with stakeholders, and help firms take advantage of new "green" opportunities. However, some studies have found that firms use compensation to punish executives who engage in environmental activities. This work examines the relationship between CEO compensation and environmental performance.
Rewarding managers for environmental performance can motivate them to undertake environmental initiatives. However, holding CEOs accountable for environmental performance may be better achieved through tools like external audits (especially if environmental committees are only symbolic). Prevention strategies also have greater payoffs for firms compared with pollution control strategies, though they are more risky and intensive to implement.
This research brings institutional and agency theories into executive compensation, which is normally explained in terms of financial performance. Limitations included using only large firms, U.S. data, and particular environmental performance measures. Future work can also analyze the relationship between compensation and performance in both directions simultaneously.
The authors examined firms in industries required to report under EPA's Toxics Release Inventory program. Data from 1997-2003 was collected on CEO pay, tenure, duality (when the CEO doubles as board chair) from Standard & Poor's ExecuComp database on 823 companies. Governance data was obtained from SEC. The paper contains a discussion of how pollution prevention and pollution control were operationalized. Authors estimated a fixed-effects model with White's correction, controlling for several factors including firm size and performance.