Management Accounting Section Midyear Meeting

CEO Incentives and Corporate Pollution: Evidence from Relative Performance Evaluation

• In Event: Performance Evaluation and Compensation

Abstract

We provide evidence on the relation between CEO pay design and environmental pollution of manufacturing firms. Building on growing evidence that environmentally conscious customers, employees, and investors favor environmentally friendly firms to the detriment of environmentally irresponsible peers, we first show that a firm’s environmental pollution is negatively related with its industry-year-adjusted financial performance, measured along multiple dimensions. We then predict that compensation contracts that force CEOs to internalize these peer firm performance comparisons are negatively related to firms’ future environmental pollution. We find support for this hypothesis among firms whose environmental pollution likely leads to the greatest backlash from customers, employees, and investors. Collectively, we contribute evidence to the debate about how to incentivize CEOs to improve their firms’ environmental, social, and governance (“ESG”) performance.

Authors

• Oscar Timmermans, London School of Economics

• Thomas Keusch, INSEAD