Top‐management compensation and environmental innovation strategy

Abstract The increasing awareness of global climate change puts more pressure on firms to reduce their environmental externalities. Managers long ignored this responsibility, which may erode business profits, going against their traditional goals. In this study, we examine the effect of top management's extrinsic incentives (i.e., reward‐driven motivation) on corporate environmental innovation strategy (i.e., eco‐innovation) using a large dataset of S&P1500 non‐financial firms for 2000–2020. The results indicate that firms with greater levels of top‐management compensation exhibit higher scores of eco‐innovation engagement. The effect holds after we address the endogeneity problem through the quasi‐natural experiment using the difference‐in‐differences analysis on the event of the Paris Agreement 2015. Our further investigations reveal that such a positive impact of managerial incentives on eco‐innovation is less intensified in the more polluting industries but more pronounced in more innovative ones.