Executive Compensation, Sustainable Compensation Policy, Carbon Performance and Market Value

Does executive pay reward firms for looking green without cutting emissions?

Faizul Haque and Collins G. Ntim examine how compensation, ESG-linked pay policies, carbon performance and valuations interact in « Executive Compensation, Sustainable Compensation Policy, Carbon Performance and Market Value ».

They rely on fixed-effects and GMM models on 4,379 firm-year observations from 13 European countries between 2002 and 2016. Their main takeaways include:

• Process-oriented carbon performance increases market value, while actual carbon performance (reductions in GHG emissions) has no significant effect.
• Higher pay and ESG-linked compensation policies increase firms’ engagement with climate-related initiatives, but show no significant effect on actual GHG emission reductions.
• Executive compensation strengthens the positive link between process-oriented carbon performance and market value, suggesting compensation amplifies symbolic climate actions rather than genuine emission cuts.
• Firms with sustainability-based compensation policies exhibit a stronger positive relationship between executive pay and process-oriented carbon performance.
• Robustness tests confirm that compensation, ESG-based policies, and process-oriented carbon performance are tightly interlinked, while actual emissions remain largely unaffected.

This article show the market rewards symbolic carbon efforts more than substantive emission reductions, a result consistent across specifications.

It suggests that financial professionals should analyse whether compensation schemes promote substantive science-based emissions reductions rather than symbolic disclosure-driven climate strategies.

Issuers can redesign incentive structures to make sure they shift the focus from climate communication to climate outcomes by embedding more explicit and measurable GHG reduction targets into executive compensation.

The study s restricted to listed firms in industrialised European countries, limiting generalisability to markets with different regulatory, cultural, or governance environments.

Process-oriented and actual carbon performance are analysed separately, without testing how disclosure-driven practices translate into real emission outcomes.