Does sustainability in executive remuneration matter? The moderating effect of Italian firms’ corporate governance characteristics

Abstract

Purpose This paper aims to verify whether the integration of sustainability in executive compensation positively affects firms’ non-financial performance and whether corporate governance characteristics enhance the relationship between sustainability compensation and firms’ non-financial performance and to expand the domain of the impact of sustainability on non-financial performance. Design/methodology/approach This analysis is based on a sample of companies listed on the Milan Italian Stock Exchange from the Financial Times Milan Stock Exchange Index over the 2016–2020 period. Regression analysis was used by using data retrieved from the Refinitiv Eikon database and the sample firms’ remuneration reports. Findings The findings of this paper show that embedding sustainability in executive compensation positively affects firms’ non-financial performance. The results of this paper also reveal that specific corporate governance features can improve the impact of sustainability on non-financial performance. Research limitations/implications This analysis is limited to Italian firms included in the Financial Times Milan Stock Exchange Index; however, the findings are highly significant. Practical implications The findings provide regulators with useful insights for considering the integration of sustainability goals into executive remuneration. Another implication is that policymakers should require – at least – listed firms to fulfil specific corporate governance structural requirements. Finally, the findings can provide investors and financial analysts with a greater awareness of the role played by executive remuneration in the long-term value-creation process. Originality/value This paper contributes to addressing the relationship among sustainability, remuneration and non-financial disclosure, drawing on the stakeholder–agency theoretical framework and focusing on Italian firms. This issue has received limited attention with controversial results in the literature.

Archival research on sustainability‐related executive compensation. A literature review of the status quo and future improvements

“…Most studies in this literature review addressed the effect of SREC on total sustainability performance, environmental and social performance, or solely on environmental performance. In line with CEO compensation (Khenissi, Hamrouni, & Farhat, 2022), there are clear indications that SREC increases total sustainability performance (Almici, 2023; Liu et al, 2023; Adu et al, 2022; Wasiuzzaman et al, 2022; Ben‐Amar et al, 2021; D'Apolito et al, 2019; Flammer et al, 2019; Ikram et al, 2019; Maas, 2018, related to hard targets; Hong et al, 2016; Velte, 2016; Banker et al, 2000). While Baraibar‐Diez et al (2019) found an insignificant link, with the inclusion of sustainability board committees as a moderator, leading to a positive significance.…”

“…Our analysis is based on stakeholder agency theory (Hill & Jones, 1992) and assumes an incentive‐alignment between top managers and stakeholders using SREC (Hill & Jones, 1992). The implementation of SREC can decrease agency conflicts (information asymmetries and conflicts of interest) because executive directors will be paid for recognizing specific environmental and/or social goals (Almici, 2023). However, SREC may be used as a pure marketing tool to signal ethical behavior to stakeholders (Winschel & Stawinoga, 2019).…”