Innovest Strategic Value Advisors

Executive Compensation and Environmental Exposure

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Courtesy of Innovest Strategic Value Advisors

H-1: Changes in firm environmental exposure are positively associated with changes in CEO compensation. Executives in environmentally-exposed businesses will demand compensation for optimal economic operating decisions that increase the firm’s environmental risk.
H-2: Ceteris paribus, use of an environmental performance-based executive compensation plan reduces the environmental risk premium component of executive compensation. The slope of the risk premium should shift downward when environmental performance-based compensation is used.

Annual short-term compensation (salary plus bonus, including bonuses tied to stock price) used as measure of compensation. Used TRI emissions as proxy for environmental exposure, and stock market returns and return on assets as financial performance measures. Regression analysis of changes in compensation and environmental exposure. Introduce dummy variables to  Innovest Strategic Value Advisors, Inc. 2
control for differences across the 3-year time period. Investigate which operation-level controls of environmental performance (TQEM, auditing, etc.) are associated with performance-based compensation plans. Finally, compare the relation between CEO compensation and alternative environmental performance measures in firms that use environmental performance-based compensation.

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