A Green Light to Executive Pay: Institutional Monitors and Pay Sensitivity to Carbon Performance

Abstract We test for relations among executive compensation premia and firm carbon performance under varying degrees of institutional investor monitoring. Using US data for 2010–2023 (15,836 firm‐years), we find that low carbon emissions firms remunerate more excessively than high emitters, indicating greater rent extraction. Excess pay to carbon performance sensitivity relates non‐linearly to institutional investors’ ownership. Although outside monitors initially discipline against overcompensating managers, carbon performance leads to more excessive pay when powerful institutional blockholders hold a controlling stake. Drawing on agency and institutional perspectives, we assert that pressure on US firms and financial institutions to decarbonize has benefitted managers of low emitting firms with a relatively stronger hand in pay bargaining.