Cause and effect of linking ESG-metrics to executive pay - Quantitative study on ESG-linked executive pay in the Nordic countries

Sammanfattning

In recent years, several companies have implemented ESG-metrics in their executive remuneration contracts. Simultaneously, shareholders and authorities have increased pressure to implement ESG-linked pay policies. The purpose of this paper is to examine how ownership structure affects the implementation of ESG-metrics in executive compensation contracts and whether these ESG-metrics impact financial return. The study limits ownership structure to large institutional owners and insider owners, as these owner types have been shown to affect compensation structure in previous studies. The study uses data from the Nordic public companies from 2005 to 2021 and performs a binary logit and difference-in-difference research model. The logistic regression showed that institutional ownership positively affects the probability of implementing ESG-linkages in executive compensation. However, the findings cannot conclude a strong economic effect of the relationship. Furthermore, our findings cannot conclude a relationship between insider ownership and the implementation of ESG-linked executive pay. Our study further found that ESG-linked executive compensation increased financial return. The study showed that linking executive pay to ESG-metrics is not a cost for shareholders but a financial benefit. Since the Nordic region has a conservative setting for executive compensation structure, our result contributes to generalizability that can be applied to settings that have been excluded in current research. Further research is urged to explore the relationship between ESG-linked pay and ESG-performance and more in depth analysis in ownership structures and a long-term perspective.