Digital transformation, employee and executive compensation, and sustained green innovation

Meihan Liu, Jingjie Zhao and Hongtao Liu

International Review of Financial Analysis, 2025, vol. 97, issue C

Abstract: While digital transformation offers potential environmental benefits, understanding how organizations effectively convert digital capabilities into sustained green innovation remains a critical challenge. Current research overlooks the role of organizational incentives in this transformation, particularly how compensation structures at different hierarchical levels might enhance or inhibit environmental innovation outcomes. This study examines how employee and executive compensation shapes digital transformation's impact on sustained green innovation capacity. Analyzing panel data from 27,658 firm-year observations of Chinese listed companies (2007–2022) through fixed-effects regression and instrumental variable approaches, we find that digital transformation significantly enhances environmental innovation capacity, with this effect strengthened by both employee and executive compensation. Our heterogeneity analysis reveals that these relationships vary systematically across organizational contexts - showing stronger effects in non-state enterprises, high-tech sectors, and economically developed regions. Beyond establishing compensation's crucial role in environmental innovation, these findings advance digital sustainability theory by demonstrating how organizational incentives and institutional contexts jointly shape the translation of digital capabilities into environmental improvements. This understanding provides a foundation for developing more effective approaches to leveraging digital transformation for sustainable development.

Keywords: Digital capabilities; Environmental innovation; Compensation structure; Organizational incentives; Institutional context (search for similar items in EconPapers)
JEL-codes: M15 M52 O32 Q55 (search for similar items in EconPapers)
Date: 2025
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:97:y:2025:i:c:s1057521924008056

DOI: 10.1016/j.irfa.2024.103873

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