Stuart L. Gillan, Jay C. Hartzell, Andrew Koch, and ... - Pitt Business

On average, firms with 1 unit net E (S,G) pay their CEO 42 (7,52) thousand dollars less in salary
than firms with net values of zero. These results imply that firms with greater degrees of
unexplained compensation tend to be also those with what are perceived as problematic ESG
practices.
In Panel B of Table IV, we examine the association between total direct compensation
and ESG scores. The results are somewhat mixed in that total direct compensation is positively
associated with the net environmental score (consistent with the rent extraction hypothesis), but
negatively associated with the net governance score, and we find no association with the net
social responsibility score. When focusing on total direct compensation and ESG concerns in
Model 2, we observe a significant negative association between pay and environmental concerns,
a result opposite to that of the salary specification. However, consistent with our findings for
salary, we find positive and significant associations between total direct compensation and social
responsibility and governance concern scores.
Overall, the results on the motivation for ESG activities provide little support for the
hypothesis that managers engage in these activities in order to pursue their own interests at the
expense of the shareholders. Instead, the results suggest that managers at firms engaging in
positive ESG activities are more careful with expenses, and have lower salaries. At the same
time, our results suggest that substantial variation exists in how the different measures are
associated with proxies for both firm performance and compensation. Put somewhat differently,
our results suggest that different types of ESG policies may have very different costs and
benefits, and thus different effects on firm value. More generally, this implies that caution is
warranted when aggregating such measures into a single ESG score.
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