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ESG-Linked Compensation, CEO Skills, and Shareholder Welfare

Author

Listed:
  • Swarnodeep Homroy
  • Taylan Mavruk
  • Van Diem Nguyen

Abstract

Executive compensation is increasingly being linked to ESG outcomes. This paper examines whether ESG targets are consistent with shareholder welfare. Using granular information on compensation contracts of Swedish CEOs, we show that ESG and financial targets are competing. ESG-linked compensation is 5 percentage points more common in well-governed firms and 6.3 percentage points more likely for CEOs with broader skill sets (generalist CEOs). ESG scores of well-governed firms improve when generalist CEOs have ESG-linked pay, but there is no effect on profitability. These results suggest that boards set ESG contracts because shareholders derive utility from ESG in addition to wealth, and ESG may not be produced without these incentives. (JEL M14, G14, D21, L21)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Swarnodeep Homroy & Taylan Mavruk & Van Diem Nguyen, 2023. "ESG-Linked Compensation, CEO Skills, and Shareholder Welfare," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(4), pages 939-985.
    • Handle: RePEc:oup:rcorpf:v:12:y:2023:i:4:p:939-985.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfad012
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    References listed on IDEAS

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    1. Franklin Allen & Elena Carletti & Robert Marquez, 2015. "Stakeholder Governance, Competition, and Firm Value," Review of Finance, European Finance Association, vol. 19(3), pages 1315-1346.
    2. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
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    Cited by:

    1. Tiantian Meng & Dan Lu & Danni Yu & M. H. Yahya & Mohd Ashhari Zariyawati, 2024. "Is executive compensation aligned with the company’s ESG objectives? Evidence from Chinese listed companies based on the PSM-DID approach," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 11(1), pages 1-15, December.
    2. Efing, Matthias & Ehmann, Stefanie & Kampkötter, Patrick & Moritz, Raphael, 2024. "All Hat and No Cattle? ESG Incentives in Executive Compensation," CEPR Discussion Papers 19610, Centre for Economic Policy Research.
    3. Ajay, Ranjitha & Jory, Surendranath Rakesh & Syamraj, K.P., 2024. "Advancing understanding of ESG score and executive compensation relationships in the Indian context," Global Finance Journal, Elsevier, vol. 62(C).
    4. Niemann, Rainer & Rohlfing-Bastian, Anna, 2026. "Carbon taxes and ESG compensation," SAFE Working Paper Series 485, Leibniz Institute for Financial Research SAFE.
    5. Michal Erben & Michal Kudej & Jan Kubalek, 2025. "The Social Factors Impact on Sustainable Business Growth Perception Within the ESG Concept," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 27(68), pages 196-196, February.
    6. Saibal Ghosh, 2025. "Tone at the top: leadership makeover and ESG focus in Indian private banks," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 22(4), pages 1112-1125, December.
    7. Andrew Ellul & Isil Erel & Camelia Kuhnen & Robert Marquez, 2023. "Finance for the Greater Good," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(4), pages 713-722.
    8. Rainer Niemann & Anna Rohlfing-Bastian, 2026. "Carbon Taxes and ESG Compensation," CESifo Working Paper Series 12582, CESifo.
    9. Niemann, Rainer & Rohlfing-Bastian, Anna, 2026. "Carbon taxes and ESG compensation," arqus Discussion Papers in Quantitative Tax Research 314, arqus - Arbeitskreis Quantitative Steuerlehre.

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    More about this item

    JEL classification:

    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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