From profits to purpose: ESG practices, CEO compensation and institutional ownership

Abstract

PurposeBased on stakeholder, agency and institutional theory, this study aims to examine the role of institutional ownership in the relationship between environmental, social and governance practices and CEO compensation.Design/methodology/approachUtilizing a fixed-effect panel regression analysis, this research utilized a panel data approach, analyzing data spanning from 2014 to 2021, focusing on US companies listed on the S&P500 stock market index. The dataset encompassed 219 companies, leading to a total of 1,533 observations.FindingsThe analysis identified that environmental scores significantly impact CEO equity-linked compensation, unlike social and governance scores. Additionally, it was found that institutional ownership acts as a moderating factor in the relationship between the environmental score and CEO equity-linked compensation, as well as the association between the social score and CEO equity-linked compensation. Interestingly, the direction of these moderating effects varied between the two relationships, suggesting a nuanced role of institutional ownership.Originality/valueThis research makes a unique contribution to the field of corporate governance by exploring the relatively understudied area of institutional ownership's influence on the ESG practices–CEO compensation nexus.