This study investigated the link between compensation and
environmental performance across high-polluting industries in the
U.S. Authors found environmental performance and CEO pay were
positively related, and pollution prevention was valued more than
pollution control. Companies can support corporate environmental
initiatives and create social benefits by linking executive
compensation to environmental performance.

Background

Companies often respond to pressure from government, media and
other groups by employing strategies to promote environmental
performance. Strong environmental performance can make the company
more accepted in the eyes of stakeholders; this in turn can lower
liability, improve reputation and relations with stakeholders, and
help firms take advantage of new “green” opportunities. However,
some studies have found that firms use compensation to punish
executives who engage in environmental activities. This work
examines the relationship between CEO compensation and
environmental performance.

Findings

• Environmental performance is positively related to CEO
  pay.
  
  
  
  



• Use of pollution prevention strategies increases pay more than
  use of pollution control strategies.
  
  
  
  



• Firms that explicitly pay more for environmental performance or
  have environmental committees do not reward environmental
  strategies more than those without; this suggests these mechanisms
  may be symbolic.

Implications for Managers

Rewarding managers for environmental performance can motivate
them to undertake environmental initiatives. However, holding CEOs
accountable for environmental performance may be better achieved
through tools like external audits (especially if environmental
committees are only symbolic). Prevention strategies also have
greater payoffs for firms compared with pollution control
strategies, though they are more risky and intensive to
implement.

Implications for Researchers

This research brings institutional and agency theories into
executive compensation, which is normally explained in terms of
financial performance. Limitations included using only large firms,
U.S. data, and particular environmental performance measures.
Future work can also analyze the relationship between compensation
and performance in both directions simultaneously.

 

Methods

The authors examined firms in industries required to report
under EPA’s Toxics Release Inventory program. Data from 1997-2003
was collected on CEO pay, tenure, duality (when the CEO doubles as
board chair) from Standard & Poor’s ExecuComp database on 823
companies. Governance data was obtained from SEC. The paper
contains a discussion of how pollution prevention and pollution
control were operationalized. Authors estimated a fixed-effects
model with White’s correction, controlling for several factors
including firm size and performance.

Citation

Berrone, Pascual, & Gomez-Mejia, Luis. (2009). Environmental
performance and executive compensation: An integrated
agency-institutional perspective. Academy of Management Journal,
52(1): 103-126.

The Network
for Business Sustainability produces practical insights for
sustainability professionals based on the most rigorous academic
research. Research topics include: climate change, socially
conscious consumers, community engagement, and valuing
sustainability