Executive compensation as a predictor of future ESG performance

Abstract

This thesis examines whether traditional long-term-oriented executive compensation structures, particularly equity-based pay (option awards and stock awards), can serve as predictors of futureenvironmental, social, and governance (ESG) performance in the absence of formal ESG-linked paymetrics. Using a panel dataset of U.S. publicly listed firms from 2018 to 2023, the study combinesexecutive compensation data from ExecuComp, ESG controversy scores from RepRisk, and manuallycoded information on the presence of ESG KPIs into pay structures. The empirical strategy involvesordinary least squares (OLS) regressions with year fixed effects regressions with clustered standarderrors and tests if equity-based compensation predicts future ESG reputational risk and if thisrelationship is moderated by the existence of ESG KPIs. The results show no statistically significantrelationship between compensation design and ESG performance. The direction of effects remainsconsistent with theoretical expectations. A positive and statistically significant interaction emergeswhen equity-based pay is combined with formal ESG KPIs, suggesting a possible complementaritybetween structural incentives and symbolic ESG metrics. This offers a preliminary clue thatcompensation design may acquire ESG-relevant meaning when paired with explicit targets. However,robustness tests do not confirm the consistency of this interaction, and alternative specificationsinvalidate its significance. Firm size is the only consistently significant predictor of ESG risk.