Public environmental risks cognition and executive compensation arrangements

This paper leverages the Chinese public's awareness of PM2.5 air pollution as an external shock to examine the causal effect of public awareness of environmental risks on executive compensation arrangements. Our study finds that after public cognition of PM2.5, firms located in polluted regions tend to offer higher wages to their executives as a form of compensation for the unpleasant workplace environment caused by PM2.5 air pollution. Private ownership and increased competition in the talent market significantly enhanced this additional compensation premium. Additionally, we find that public awareness of these risks also increases executive pay-performance sensitivity. This paper provides solid evidence of the causal impact of public environment risk cognition on executive compensation arrangements.