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Executive compensation with environmental and social performance

Author

Listed:
  • Pierre Chaigneau
  • Nicolas Sahuguet

Abstract

How can managers be incentivized to create both financial and social value? Since managers can anticipate how their decisions impact social performance metrics, they may game a compensation scheme based on these measures. Nevertheless, the optimal compensation contract still incorporates social performance metrics when the board’s preferred level of social investment exceeds the level that maximizes the stock price. In this case, gaming distorts social investments, and the sensitivity of pay to social performance is reduced to mitigate this effect. When multiple independent social performance measures are available, the inefficiencies caused by gaming can be alleviated. Our findings suggest that efforts to harmonize social performance measurement may have unintended negative consequences.

Suggested Citation

  • Pierre Chaigneau & Nicolas Sahuguet, 2025. "Executive compensation with environmental and social performance," Review of Finance, European Finance Association, vol. 29(3), pages 779-818.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:3:p:779-818.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaf012
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    More about this item

    Keywords

    corporate governance; corporate social responsibility; CSR contracting; ESG measurement; executive compensation; gaming of incentives;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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