Board interlocks, ESG compensation, and CEO pay structures

Wang, Cong 2024. Board interlocks, ESG compensation, and CEO pay structures. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

The evolving landscape of corporate governance has seen an increasing emphasis on Environmental, Social, and Governance (ESG) criteria, which has reshaped how firms approach executive compensation. This dissertation explores the diffusion and impact of ESG-linked compensation practices and CEO pay structures among U.S.-listed firms, focusing particularly on the role of board interlocks and compensation consultants. By analyzing detailed data from 2002 to 2021, this research aims to uncover how these compensation practices propagate through corporate networks, how the integration of ESG criteria affects corporate performance, and the influence of compensation consultants on the uniformity of CEO pay structures. Chapter 2 investigates whether the adoption of ESG-linked compensation policies is influenced by peer effects within corporate networks. Using detailed directors’ employment data from BoardEx, the study identifies interlocked directors and constructs peer groups for each firm. The analysis, based on a sample of 14,219 firm-year observations from 2,139 U.S.-listed firms, reveals that firms are 2.7% more likely to adopt ESG-linked pay if at least one of their board-connected peers has done so. This finding underscores the significant role of peer effects in the adoption of ESG practices. Despite this, the study finds that these peer-induced adoptions do not lead to tangible improvements in ESG performance. The research also examines how various roles of interlocked directors impact ESG-linked compensation, providing robust evidence of peer learning effects on compensation policies. The third chapter delves into the impact of incorporating ESG criteria into executive compensation frameworks on CEO pay scales and overall corporate ESG performance. The analysis, spanning from 2006 to 2021, reveals that ESG-linked compensation significantly increases CEO total compensation, suggesting that such incentives are effective beyond mere ethical alignment. However, despite these increased financial incentives, there is a notable lack of significant improvement in firms' ESG performance. This discrepancy highlights a potential disconnect between the intended sustainability goals of ESG-linked pay and the actual outcomes. The findings call for a reevaluation of how ESG metrics are integrated into executive compensation to ensure they drive meaningful corporate sustainability rather than superficial compliance. The fourth chapter examines the role of compensation consultants in shaping CEO pay structures, particularly in light of regulatory changes. Utilizing firm-pair level data and leveraging the 2009 SEC Disclosure Rule Amendment as a natural experiment, the study finds that firms employing multiservice consultants exhibit a higher degree of CEO pay similarity. This alignment is attributed to the consultants' influence, which is further amplified by the regulatory requirements aimed at enhancing transparency and reducing conflicts of interest. The research also indicates that firms with higher CEO compensation are more likely to engage compensation consultants to justify their pay structures. These findings extend the literature on compensation consultants by highlighting their strategic role in shaping executive compensation practices and the impact of regulatory interventions on these practices. Overall, this dissertation provides comprehensive insights into the dynamics of ESG-linked compensation practices and CEO pay structures. It highlights the significant role of peer effects and compensation consultants in shaping executive compensation policies while also pointing to the limitations of current ESG-linked pay practices in achieving substantial improvements in corporate sustainability. The findings contribute to the ongoing discourse on aligning executive incentives with long-term corporate goals and offer valuable implications for policymakers, corporate boards, and investors. Future research should continue to explore these dynamics, focusing on optimizing the design and effectiveness of compensation practices to better align with genuine sustainability objectives.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Schools > Business (Including Economics)
Date of First Compliant Deposit:	1 May 2025
Last Modified:	01 May 2025 15:36
URI:	https://orca.cardiff.ac.uk/id/eprint/177947

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