The effect of nonfinancial executive compensation policies on firm value and corporate performance
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Firms increasingly experience pressure from stakeholders to take responsibility for their nonfinancial behavior. Nonfinancial executive compensation policies are corporate governance mechanisms to address the agency problem due to the discrepancy between stakeholders’ interests and executives’ incentives. This study tests whether nonfinancial compensation policies are related to firm value and corporate performance using a sample of 319 European firms covering the period of 2005–2018. The results indicate that nonfinancial compensation policies are positively related to nonfinancial performance and firm value but negatively related to financial performance. The findings suggest that nonfinancial compensation policies are effective corporate governance mechanisms affecting firm value and corporate performance by aligning executives’ incentives with stakeholders’ interests. In addition, the results show that corporate social responsibility committees weaken the relationship between nonfinancial compensation policies and corporate performance but strengthen the relationship between nonfinancial compensation policies and firm value. Furthermore, the study found that stakeholder engagement strengthens the relationship between nonfinancial compensation policies and firm value but has no significant effect on corporate performance. This paper contributes to existing research on compensation policies as a corporate governance mechanism to incentivize sustainable business conduct by executives. It is relevant for boards of directors, regulatory bodies and policymakers.
Faculteit der Managementwetenschappen