Climate-linked compensation, societal values, and climate change impact: International evidence

Abstract

Research question/issue

We examine whether linking executive compensation to climate-related performance is associated with better firm-level climate change impact. We also explore the interaction of culture and climate-linked incentive compensation with climate change impact.

Research findings/insights

Using firm-level climate change strategy and carbon emissions to measure climate change impacts, we find that climate-linked compensation is associated with improved climate change strategy. Climate-related incentives for the CEO and other (operational) executives are found to be negatively associated with firm-level carbon emissions, although the relationship is not as strong; however, no such association is found for climate-linked compensation of the board and top-3 executives. Country-level attitudes to whether solutions for environmental issues are considered a joint (society) responsibility versus an individual's personal responsibility are found to have an effect on the association between climate-linked compensation and climate change impacts. We also find that country-level cultural views enhance the positive association between climate-linked compensation and climate change strategy but not the association with actual firm-level carbon emissions. Further analysis shows that non-US firms drive our study's findings. Finally, improvement in climate strategy is found to have a positive effect on Tobin's Q but has no effect on profitability.

Theoretical/academic implications

Academic research is growing on the role of climate change risk and carbon emissions in corporate decisions. The findings of our study are important given that linking executives' compensation with climate performance is gaining momentum. To the best of our knowledge, this is the first study to examine any link between climate-linked compensation and climate change impact.

Practitioner/policy implications

While climate-linked compensation is associated with positive changes in climate strategy, its association with firm-level carbon emissions is promising. This is particularly the case when this compensation is offered to executives who are likely to make operational decisions with a direct impact on a firm's carbon footprint and carbon emissions.