Executive Compensation and Corporate ESG Performance: Evidence from China

Abstract

Abstract Enterprise's ESG investment is a sustainable development strategy, which can enhance the enterprise's sustainable development ability in the long run. However, whether executive compensation incentive can improve enterprise ESG performance has not been concluded yet. This paper aims to investigate the inherent relationship and operational mechanisms between executive compensation and corporate ESG performance. The study draws upon effective contract theory and incentive theory to examine A-share listed companies in Shanghai and Shenzhen, China, over the period of 2012-2021. The empirical findings reveal the following: Firstly, executive compensation incentives significantly enhance corporate ESG performance. Secondly, the mechanism analysis demonstrates that executive compensation incentives contribute to corporate ESG performance by promoting corporate social responsibility, enhancing internal control quality, and improving financial performance. Thirdly, further investigation reveals that the positive impact of executive compensation incentives on corporate ESG performance diminishes with increasing management shareholding, while it strengthens with a higher proportion of independent directors. Lastly, when compensation exceeds appropriate levels, overcompensation leads to a decline in corporate ESG performance.