CEO pay structure and ESG rating disagreement

Abstract

As the concept of sustainable development continues to gain prominence, environmental, social, and governance (ESG) ratings have become critical factors in investment decision-making. However, discrepancies among ESG rating agencies have led to inefficiencies in capital market pricing. This study investigates the relationship between CEO compensation structure and ESG rating disagreement, utilizing ESG ratings from six agencies for A-share listed companies. The findings indicate that a higher proportion of equity-based compensation in a CEO's pay structure is associated with lower ESG rating disagreement. Mechanism tests suggest that equity pay can reduce ESG rating discrepancies by improving the quality of ESG disclosures and ESG practices. Cross section analysis demonstrate that this relationship is more pronounced in firms with greater CEO power, weaker information environments, fewer green investors, as well as in Non-SOE enterprises and in Non-heavily polluting industries.