Sustainability-oriented targets in executive compensation – symbolic measures or significant catalyst for a sustainable transition?

Abstract

Purpose This study aims to analyse the motivations and underlying assumptions of decision makers driving the adoption of sustainability-oriented targets in executive compensation (SCTs) to better understand SCTs’ impact on sustainability performance. Design/methodology/approach Through a qualitative approach, 15 in-depth interviews are conducted in a two-tier governance setting. Participants include management and supervisory board members, compensation consultants and other stakeholders involved in proxy voting. Findings SCT implementation is primarily determined by meeting shareholders’ expectations rather than those of other stakeholders. Decision makers react in a differentiated way to increased expectations by implementing either primarily symbolic or substantive measures and encounter different implementation challenges like insufficient data quality and a lack of experience within supervisory boards, both of which potentially contribute to decoupling. Research limitations/implications The study offers valuable insights for companies in designing SCTs and emphasises the significance of addressing decoupling to effectively enhance sustainability performance through SCTs and provides a foundation for future studies aimed at analysing this phenomenon. Originality/value Using a neo-institutional theory lens, this study marks one of the first interview-based investigations to distinguish between symbolic and substantial SCTs. It delves deeply into the role of decoupling and the associated challenges, offering fresh perspectives within the under-researched framework of a two-tier corporate governance structure. Moreover, this study aims to meticulously capture the real-world design practices and implementation processes of SCTs through experts, an aspect that was emphasised as a limitation in previous studies.