Can financial metrics provide incentives for environmental performance improvement?

Thomas Keusch and Oscar Timmermans

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine whether financial performance metrics in CEO compensation contracts provide incentives for environmental performance improvement, and the conditions under which such incentives arise. Using toxic pollution as our primary outcome, we find that relative financial performance evaluation (RPE) is negatively associated with future pollution in firms whose environmental impacts are subject to greater scrutiny, whereas other financial incentives, such as equity portfolio delta and new equity grants, show no such association. This pattern is consistent with theories of corporate social responsibility and, as supported by complementary tests, with the idea that stronger environmental performance can improve a firm’s relative financial position by attracting customers, employees, and shareholders from less responsible peers. We further show that the RPE-pollution relation varies predictably with various RPE plan characteristics and stakeholder switching costs, persists when we instrument for the use of RPE, and operates in part through increased environmental innovation.

Keywords: CEO compensation; relative performance evaluation; corporate social responsibility; sustainability; ESG; stakeholder monitoring (search for similar items in EconPapers)
JEL-codes: G34 M41 M52 Q52 Q56 (search for similar items in EconPapers)
Date: 2026-12-01
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Published in Accounting, Organizations and Society, 1, December, 2026, 117. ISSN: 0361-3682

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:139003

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