CEO Compensation and ESG Performance: The Influence of Financial Outcomes and CEO Power

Abstract

This study reviews literature at the intersection of CEO compensation and ESG goals. Combining an integrated bibliometric and structured literature review with an empirical analysis of US publicly listed companies from 2013 to 2023, the paper identifies a central governance tension where ESG performance is increasingly considered in CEO compensation decisions while also creating potential room for managerial opportunism. The empirical analysis investigates whether ESG performance is reflected in CEO compensation and whether this relationship is moderated by financial performance and CEO power. The findings reveal a positive association between ESG performance and CEO compensation, with stronger effects when CEOs also hold board chair positions, suggesting that powerful CEOs may use ESG performance to justify higher compensation. Additional analyses show that environmental and social performance are more strongly associated with CEO compensation than governance performance, while the interaction between ESG performance and CEO duality becomes more pronounced in firms with weaker financial performance. The results further indicate that ESG performance remains a stable determinant of CEO compensation over time and becomes more salient following the institutionalisation of ESG practices after 2018. Overall, the findings connect the review and empirical evidence by suggesting that the relationship between ESG performance and CEO compensation is influenced by the concentration of managerial power. This study provides a deeper understanding of ESG performance and CEO compensation dynamics and calls for more transparent compensation structures that are more aligned with stakeholder expectations.