ESG‐linked Executive Compensation and Firm Value: The Mediating Role of Environmental Innovation and Moderating Role of ESG Training

ABSTRACT This study examines whether environmental, social, and governance (ESG)‐linked executive compensation influences firm value and the channels through which its effects emerge. Using panel data of listed firms from STOXX Europe 600 during 2015–2023, the study employs Tobin's Q and price‐to‐book value to assess firm value and robustness, respectively. The empirical analysis uses firm‐ and year‐fixed–effects models complemented by system‐generalized method of moments (GMM) and an event‐study difference‐in‐differences design to address endogeneity. The results show that ESG‐linked compensation is positively associated with environmental innovation. In the baseline fixed‐effects estimates, moving from no ESG‐linked pay to ESG‐linked pay is associated with a 7.6‐point increase in the environmental innovation score, equivalent to approximately 14% of its sample mean, and approximately 5.2% higher firm value. However, the association with firm value is not robust under system‐GMM and event‐study specifications. ESG‐related training conditions the ESG‐linked pay–environmental innovation relation; governance variables do not show consistent moderating effects. The mediation analysis does not support a statistically significant indirect effect. Overall, ESG‐linked pay appears to influence firm behavior more consistently compared with immediate financial outcomes.