CEO Compensation and Sustainability Reporting Assurance: Evidence from the UK

Habiba Al-Shaer,Mahbub Zaman

doi:10.1007/s10551-017-3735-8

Habiba Al-Shaer, Mahbub Zaman

Open Access

https://doi.org/10.1007/s10551-017-3735-8

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Abstract

Companies are expected to monitor sustainable behaviour to help improve performance, enhance reputation and increase chances of survival. This paper examines the relationship between sustainability committees and independent external assurance on the inclusion of sustainability-related targets in CEO compensation contracts. Using a sample of UK FTSE350 companies for 2011–2015 and controlling for governance and firm characteristics, we find both board-level sustainability committees and sustainability reporting assurance have a positive and significant association with the inclusion of sustainability terms in compensation contracts. However, there is no joint impact between the voluntary use of independent external assurance and the role of sustainability committees on CEO compensation contracts. Sustainability-related terms in compensation contracts are more likely to be included, and higher compensation is likely to be paid, when assurance is provided by a Big4 firm and when a company operates in a sustainability-sensitive industry. Our findings highlight the potential of assured sustainability reports in assessing CEO performance in sustainability-related tasks, especially when sustainability metrics are included in CEO compensation contracts. Overall, our results suggest companies that invest in voluntary assurance are more likely to monitor management’s behaviour and be concerned about the achievement of sustainability goals.

Highlights

There is an increased emphasis on incentivising and rewarding management for the achievement of social goals
This paper provides evidence on the impact of sustainability reporting assurance on CEO compensation after controlling for corporate governance mechanisms and firm-specific factors
Our results show that providing references to sustainability-related targets in CEO compensation contract disclosed in companies’ annual reports in year t will lead to acquiring assurance in year t, while it is not very likely for the following year

Summary

Introduction

There is an increased emphasis on incentivising and rewarding management for the achievement of social goals. This paper focuses on the role of governed sustainability information, i.e. the existence of sustainability committees and independent external assurance, on the inclusion of sustainability-related targets in CEO compensation contracts of UK FTSE350 companies. Highly sustainable companies are more likely to monitor sustainable behaviour, i.e. have a stronger association between sustainability-related terms in compensation contracts and both voluntary assurance and sustainability committees. Our findings suggest that sustainability assurance is rewarded with higher CEO compensation and that companies concerned about achievement of sustainable goals adopt relatively more objective and credible monitoring mechanisms. It is sustainability committees and voluntary independent external assurance that affects the inclusion of sustainability targets in compensation contracts. ‘Results and Analysis’ section reports our empirical findings, and the final section draws conclusions

Literature Review

Results and Analysis

Empirical Tests and Findings

Summary and Conclusion