A Critical Review of Executive Compensation Policies Grounded in ESG Principles

Abstract

High executive salaries often lead executives to prioritize short-term gains over long-term ESG benefits. This review explores how reducing executive compensation, influenced by environmental regulations, impacts innovation in sustainable technologies. As shareholders demand more ESG-focused models, the traditional compensation model is shifting to link compensation with environmental and social goals. The literature focuses on greenhouse gas emissions, employee satisfaction, and regulatory compliance. This review covers global ESG-based incentives, followed by country-specific approaches in China, France, Germany, India, Italy, South Africa, Sweden, and the United States. It concludes with alternative frameworks from financial institutions. Executives are more likely to engage in environmental initiatives when personal gains are tied to these goals. Equity-based incentives are favored over salary-based bonuses. Concepts like the parity pill aim to increase investor trust and transparency. As investors become more environmentally conscious, they expect companies to align with these values. Executives are encouraged to prioritize long-term sustainability over short-term personal gains.