The Moderating Effect of sustainability-linked CEO Compensation on the Relationship Between ESG Scores, Firm Performance
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2025-07-07
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en
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In recent years, Environmental, Social, and Governance (ESG) activities have become more common in business, aiming to build stakeholder trust and improve firm performance. One approach firms use is linking CEO compensation to sustainability goals, which may help improve ESG performance. However, it is still unclear whether this also improves financial performance. This study explores whether CEO compensation tied to sustainability influences the relationship between ESG performance (measured by ESG scores) and firm performance (measured by return on assets and return on equity). Because firm performance could also affect ESG scores, or both could be influenced by other factors, the study uses an instrumental variable (IV) regression method. Industry-average ESG scores and their interaction with CEO compensation are used as instruments to improve the reliability of the results. The findings show that while higher ESG scores do not always lead to better financial outcomes, firms with sustainability-linked CEO pay tend to perform better. Still, when ESG performance increases within those firms, it may reduce financial performance. This suggests that ESG goals need to be carefully aligned with business strategy to be financially effective.
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Faculteit der Managementwetenschappen