Explicit contracting as a determinant of the linkage between environmental performance and executive compensation

James J. Cordeiro

115B Hartwell Hall

Department of Business Administration & Economics

SUNY Brockport

Brockport, NY 14420

(585) 395-5793

(583) 395-2542 (Fax)


Joseph Sarkis

Graduate School of Management

Clark University

950 Main Street

Worcester, MA 01610

508) 793-7659

(508) 793-8822 (Fax)


Empirical research in the area of corporate sustainability highlights potential conflicts between corporate financial performance and environmental performance. In such a situation, agency theory arguments applied specifically to the corporate environmental context predict that top management compensation should be explicitly linked to environmental performance in order to bring about proper alignment of organizational environmental goals and management incentives. 

We test this proposition for a sample of 207 Standard and Poor 500 firms in the US in 1997 who explicitly report in Investor Responsibility Research Council (IRRC) surveys the presence or absence of a contractual link between environmental performance and executive compensation. We find that in firms with an explicit linkage between environmental performance and executive contracts, there is some evidence of a significant impact of firm-level environmental performance on CEO compensation levels exists but that no impact exists for firms without an explicit linkage. The linkage we observe holds only for IRRC compliance and spills indices but does not hold for toxic emissions indices of environmental performance.  

KEYWORDS: Economic Incentives; Governance; Corporate Environmental Performance

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All Submissions
8:00 AM-8:00 PM, Friday, June 15, 2007, Oral

The Ontario, Canada 2007 Meeting