CEO compensation structures and corporate toxic emissions

We study how the time horizon of CEO compensation contracts affects corporate ESG initiatives. By investigating a plant-level data on toxic pollutants in the U.S., we first discover that CEOs with compensation contracts highly sensitive to short-term financial performance tend to emit a greater amount of toxic pollutants from their production plants. Second, we find that contracts offering longer pay durations can mitigate this adverse effect of short-term managerial focus on toxic pollution. Furthermore, these effects are more pronounced in areas facing stricter environmental regulations. In a placebo test, we exploit the Securities and Exchange Commission’s (SEC) mandate for transparent executive pay disclosure as a quasi-natural experiment and find that these effects are absent in the years before the mandate. Our findings suggest the importance of integrating long-term incentives when structuring compensation packages, in terms of corporate environmental performance.