ESG-Linked Compensation, CEO Skills, and Shareholders’ Welfare

CEO compensation is increasingly being linked to ESG outcomes. In this paper, we provide evidence that ESG targets in CEO pay reflect stakeholder welfare. Using granular information on contract design from Swedish firms, we show that ESG-linked contracts are more likely for CEOs with broader skill sets (generalist CEOs) in well-governed firms and after peer firms are penalized for environmental misbehaviours. ESG scores of well-governed firms improve when generalist CEOs have ESG-linked pay, but there is no such effect for poorly governed firms. We find no significant effect of ESG-linked CEO pay on profitability, irrespective of governance and CEO skill set