Sustainability Pays: How ESG Performance Shapes CEO Incentives and Governance

This study examines how firms’ ESG performance is reflected in CEO compensation design. The analysis shows that firms with stronger ESG performance award lower total CEO pay while placing greater emphasis on performance-based and equity-based incentives. Governance quality further strengthens the alignment between CEO pay and firm performance, and these effects are more pronounced in ESG-sensitive industries where sustainability issues are financially material. In addition, ESG performance and long-term-oriented CEO incentives jointly promote greater investment in innovation and intangible capital, implying that ESG-aligned incentive structures shape executives’ project selection and prioritization toward long-horizon, innovation-oriented initiatives. Overall, the findings indicate that the rise of ESG as a corporate priority is reshaping executive incentives toward stronger discipline, performance alignment, and sustainable value creation.