Esg-Linked Executive Compensation and Managerial Talent

Stakeholders are increasingly concerned with the social and environmental impacts of modern corporations. These concerns have led to directly incentivizing CEOs by making their pay contingent on ESG outcomes. In this paper, we propose to examine the implications of ESG-linked pay on the CEO labour market. The key hypothesis is that the integration of ESG-linked targets increases the complexity of the managerial incentive contracts and attracts more talented CEOs to companies that implement such contracts, which , in turn, will improve ESG performance. Insofar as firms are able to charge higher price through market segmentation, better ESG outcomes can improve financial performance. Combining several administrative data from Swedish firms, we propose to empirically test these hypotheses. Novel data on environmental misdemeanor charges against peer-group firms will be used to account for endogenous association of ESG-linked pay and ESG performance