Abstract This study examines how executive compensation systems can incorporate environmental, social, and governance (ESG) objectives to support sustainable corporate behavior. It develops a conceptual framework that specifies key principles and design characteristics of ESG-linked incentives and applies this framework to the analysis of executive pay practices among HDAX-listed German firms. Using a systematic content analysis of remuneration disclosures for 2021 and 2022, the study identifies considerable heterogeneity in the structure and prevalence of ESG-related pay components. Based on these insights, a composite measure of ESG incentive quality is proposed and empirically validated. The results indicate that higher-quality ESG incentives are positively associated with firms’ ESG performance. The study contributes to the literature on executive compensation and corporate sustainability governance by advancing the conceptual understanding of ESG-linked pay and providing empirical evidence on its relevance for sustainable firm outcomes.
Spallek et al. (Sun,) studied this question.