Non-Financial Factors and Financial Returns: The Impact of Linking ESG Metrics to Executive Compensation on Corporate Financial Performance

Although the practice of linking Environmental, Social, and Governance (ESG) metrics to executive compensation (ESG compensation) has become increasingly common worldwide, consistent evidence of its economic consequences for corporate value remains limited. Drawing on agency theory and a sustainable governance perspective, this study examines how responsibility-oriented incentive mechanisms translate into corporate financial performance. Using textual data from a large sample of Chinese listed companies and employing the BERT deep learning model for empirical analysis, the results show that ESG compensation significantly improves subsequent financial performance. Further analysis reveals that this effect is primarily driven by incentives related to the environmental and social dimensions of compensation structures. In addition, ESG compensation enhances firms’ ESG rating performance and reduces rating divergence, thereby lowering stakeholders’ transaction costs. The moderating analysis indicates that managerial ability and financial slack both strengthen the positive effect of ESG compensation on financial performance. Overall, this study uncovers the internal mechanism through which ESG compensation promotes corporate value creation and clarifies its practical implications for sustainable corporate governance.