Discover Sustainability (Dec 2024)

Aligning CEO compensation with sustainability performance: the role of CEO duality, board size, and compensation committees

  • Muhammad Farooq Shabbir,
  • Jalal Rajeh Hanaysha,
  • Elain Yen Nee Oon,
  • Muhammad Asif,
  • Hassan Danial Aslam

DOI
https://doi.org/10.1007/s43621-024-00491-0
Journal volume & issue
Vol. 5, no. 1
pp. 1 – 16

Abstract

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Abstract This study uses agency theory to examine how board size, compensation committee, and CEO duality align the pay-performance relationship with long-term sustainability performance. We examined companies from nine Asian emerging economies with a sustainability score greater than 0.50 between 2010 and 2019. The findings support the pay-performance relationship proposed by agency theory in the presence of a robust governance structure. The relationship is more significant in firms with high ESG scores. Our study claimed that the compensation committee has a significant role in aligning sustainability objectives with CEO compensation, which improves the firm's market and financial performance. However, board size has no discernible impact on the CEO pay-performance relationship. CEO duality negatively affects this alignment since the CEO misuses their power to influence the compensation committee's role in tying sustainability agendas with the CEO's pay performance framework. Furthermore, CEO compensation is significantly impacted by firm size, which is justified by the complexity and increased responsibilities associated with managing larger firms. Conclusively, this investigation suggests that the inconclusive evidence on CEO compensation around the world should be studied with governance mechanisms. This study advances knowledge of agency theory and the connection between sustainability performance and compensation. The findings of the study highlight the role of governance structure in aligning executive compensation with sustainability to improve long-term performance. These findings suggest policymakers promote strong governance mechanisms that reduce the CEO's power to influence the board and enhance the independence of the compensation committee to independently design the executive compensation package essential for aligning executive pay with sustainability performance.

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