Executive compensation with environmental and social performance

Pierre Chaigneau and Nicolas Sahuguet

Review of Finance, 2025, vol. 29, issue 3, 779-818

Abstract: How can managers be incentivized to create both financial and social value? Since managers can anticipate how their decisions impact social performance metrics, they may game a compensation scheme based on these measures. Nevertheless, the optimal compensation contract still incorporates social performance metrics when the board’s preferred level of social investment exceeds the level that maximizes the stock price. In this case, gaming distorts social investments, and the sensitivity of pay to social performance is reduced to mitigate this effect. When multiple independent social performance measures are available, the inefficiencies caused by gaming can be alleviated. Our findings suggest that efforts to harmonize social performance measurement may have unintended negative consequences.

Keywords: corporate governance; corporate social responsibility; CSR contracting; ESG measurement; executive compensation; gaming of incentives (search for similar items in EconPapers)
JEL-codes: G30 M52 (search for similar items in EconPapers)
Date: 2025
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