Corporate Strategy for the Green Transition: Are Executives Incentives Effective?

This paper examines whether green incentives embedded in executive compensation schemes effectively reorient firms’ innovative activities toward environmentally sustainable technologies. Drawing on agency theory and the natural resource-based view, we argue that green incentives can mitigate managerial short-termism and encourage long-term, sustainability-oriented innovation. Using a panel of publicly listed U.S. and European firms that participate in the Carbon Disclosure Project over the period 2010–2020, we analyze the impact of green incentives on multiple dimensions of green innovation, including green patenting, the technological distance of firms’ innovation portfolios to green domains, and the integration of green knowledge into non-green technologies. Our results show that firms adopting green incentives exhibit higher green innovation output and a significant reorientation of technological search toward green domains, beyond what can be inferred from green patent counts alone. These effects are stronger for firms with better prior environmental performance and in more supportive institutional contexts. Overall, the findings suggest that executive green incentives shape the direction of firms’ innovative activities, highlighting the role of internal governance mechanisms in sustainability transitions.