Environmental Performance and Executive Compensation

This paper investigates the use of environmental performance as a component of executive compensation. Results indicate that compensation of chief executive officers at firms with higher levels of environmental exposure includes an environmental risk premium; top executives receive compensation for the personal risks associated with working for an environmentally risky firm. This risk premium is reduced when there is an environmental component in executive compensation. Basing executive compensation upon environmental performance is only one strategy available to firms to control environmental exposure. We find evidence that firms use a variety of methods as substitutes and complements to environmental performance-based compensation