Sustainable compensation policies and its effect onenvironmental, social, and governance scores

Abstract

The incorporation of sustainable compensation policies reflects the willingness of companies to manage the behavior of directors towards long-term goals, responding to a large number of stakeholders with different demands. Analysis of compensation policies is biased to financial performance, so that the effectiveness of sustainable policies remains unexplored. This paper investigates whether having a sustainable compensation policy has a positive influence on environmental, social, and governance (ESG) and economic scores. These relationships are tested by estimating a fixed-effects model for listed companies from Spain, France, Germany, and the United Kingdom in the period 2005-2015. According to the results, sustainable compensation policies affect ESG scores, but especially when firms have a corporate social responsibility committee acting as control mechanism and supporting the achievement of those objectives, triggering better nonfinancial performance. This paper contributes to literature by exploring the effect of sustainable incentives and expands the range and richness of results by including four different scores.