Aligning pay with purpose: do ESG-linked executive compensation policies matter?

This study examines how executive compensation structures affect firms’ sustainability performance in Europe. Using panel data on 2,176 listed companies over the period 2018–2023 and Fixed Effects and Correlated Random Effects models (CRE), it compares firms adopting ESG-linked compensation schemes with those relying solely on financial incentives or lacking incentive policies altogether. The results show that the absence of structured compensation or the exclusive use of financial-based incentives is associated with significantly lower ESG scores. These findings underscore the importance of integrating ESG criteria into executive compensation as a key governance mechanism to enhance corporate sustainability performance.