Managerial incentives for ESG in the financial services industry: direct and indirect association between ESG and executive compensation

Jooh Lee, Kyungyeon (Rachel) Koh, Eunsup Daniel Shim

Research output: Contribution to journalArticlepeer-review

4 Scopus citations


Purpose: This study investigates the empirical association between environmental, social and corporate governance (ESG) performance and top executive compensation in the US financial services industry. Considering that financial firms can inflict systemic shocks across the economy, it has been argued that they must conduct ethical and sustainable business in accordance with ESG principles. This study examines whether ESG efforts are beneficial to managers. Design/methodology/approach: The authors use CEO compensation and ESG performance ratings data for all US financial firms (SIC 6000–6799) from 2015 to 2019. Employing fixed effects regressions, the authors test whether lagged ESG performance is related to CEO compensation, after controlling for other firm characteristics such as size, financial performance, leverage and CEO stock ownership. Findings: The authors find that lagged ESG ratings are strongly associated with all forms of compensation. An increase of one standard deviation in the composite ESG rating is associated with a 14%–16% increase in the total pay. Among the three ESG pillars, only S (social) and G (governance) exhibit persistent and significant associations with both short- and long-term executive pay. The authors also document the significant moderating effects of ESG on the relationships among firm performance, size, leverage, ownership and executive pay, identifying how ESG is associated with compensation. Originality/value: The authors conclude that managers receive ESG incentives implicitly and explicitly. The novel finding of direct and indirect associations between ESG and top executive compensation contributes to the growing ESG literature on the financial sector and ongoing debate about the explicit inclusion of ESG targets in compensation design.

Original languageEnglish (US)
Pages (from-to)10-27
Number of pages18
JournalManagerial Finance
Issue number1
StatePublished - Jan 4 2024

All Science Journal Classification (ASJC) codes

  • Finance
  • Strategy and Management


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