Symbolism or substance? The alignment of ESG Strategy and ESG Pay in italian listed companies

Frame of the research. The integration of Environmental, Social, and Governance (ESG) factors into executive compensation has emerged as a key component of corporate governance, driven by regulatory pressures and investor expectations. However, the extent to which ESG-linked pay aligns with corporate sustainability strategies remains a critical issue. Purpose of the paper. The research aims to assess the degree of alignment between ESG-linked remuneration (ESG pay) and corporate sustainability strategies (ESG Strategy), identifying whether these compensation mechanisms effectively drive sustainable business practices or not. Methodology. The study examines a sample of FTSE MIB-listed companies from 2022 to 2024, analyzing annual reports, sustainability reports, and remuneration policies. A novel alignment indicator is introduced, quantifying the coherence between ESG KPIs in ESG pay and ESG Strategy. The analysis also includes sectoral comparisons and a classification of firms based on their ESG pay-strategy alignment. Results. Findings reveal significant heterogeneity in ESG pay-ESG strategy alignment across firms. The study identifies four clusters: Sustainability Leaders, Followers, Careless, and Apathetic. Notably, some firms allocate substantial ESG-linked remuneration without meaningful strategic integration, raising concerns about greenwashing. Research limitations. This study focuses on Italian publicly listed firms, which may limit its applicability to different regulatory and institutional settings. Moreover, as the analysis relies on publicly available corporate disclosures, the qualitative nature of ESG reporting could introduce interpretative biases. Managerial implications. Companies should refine their ESG KPIs to ensure alignment with long-term corporate goals and avoid superficial compliance. Originality of the paper. This study introduces the first indicator to measure the alignment between ESG Pay and ESG Strategy, moving beyond binary classifications. This indicator serves as a benchmark for research and investment analysis, enhancing governance alignment in sustainability-driven compensation.