ESG and Executive Performance-Compensation Sensitivity : Financial and Non-Financial Performance

[Purpose] The purpose of this study is to analyze how corporate ESG management affects executive compensation. To achieve this, the study examines the impact of executive performance, categorized into financial performance(accounting performance and stock performance) and nonfinancial performance(ESG performance), on the sensitivity of executive compensation. [Methodology] The research sample consists of companies listed on KOSPI and KOSDAQ from 2010 to 2022, including those with and without ESG ratings. The study analyzes the relationships between accounting performance, stock performance, ESG performance, and executive compensation. Chi-square tests were conducted to examine the relationship between the presence of ESG ratings and industry distribution, and regression analysis was employed to assess the impact of various performance metrics on the sensitivity of executive compensation across different corporate samples. [Findings] First, both accounting performance and stock performance play significant roles in determining executive compensation, with the interaction between ESG performance and stock performance showing a positive influence on changes in executive compensation. Second, companies with ESG ratings place greater emphasis on financial performance when determining executive compensation, indicating that companies with higher ESG performance tend to prioritize long-term financial results. Third, in companies actively engaged in ESG management, ESG performance is indirectly reflected in executive compensation through stock performance, suggesting a close linkage between ESG performance and financial outcomes. These findings highlight the necessity of incorporating ESG performance into the design of executive compensation. [Implications] First, companies should directly incorporate ESG performance into executive compensation design to encourage executives to actively pursue ESG management. While current compensation structures tend to reflect ESG performance indirectly through stock performance, it is crucial to include ESG performance directly in the compensation system. Second, by assigning responsibility for ESG performance alongside financial performance to executives, companies can enhance social responsibility and long-term value creation. This approach will help companies achieve sustainable management and foster long-term growth.