Variable executive compensation linked to ESG goals: evidence from the Nordics

Abstract: The practice of linking executive compensation to the performance on environmental, social and governance (ESG) factors, commonly referred to as ESG Pay, remains an underexplored issue in academic literature. This study focuses on the relationship between ESG Pay, financial performance and ESG performance in the Nordic region. The data, built from merging the Nordic Compass and Capital IQ databases, consists of a panel of 490 companies with 2291 observations, from the years 2016 to 2021. The study provides evidence of a positive link between total CEO compensation and ESG Pay and a negative relationship between total CO2 emissions and ESG Pay. Moreover, no evidence is found of a link between ESG pay and the return on assets or the return on equity. ESG Pay is less prevalent in the Nordics as compared to other countries in the European Union and the United States, with Swedish companies leading its implementation within the Nordic region.