When Does ESG Misconduct Cost the CEO ? Sustainability Orientation and Compensation Outcomes Across European Firms

ABSTRACT This study provides new evidence on when environmental, social, and governance (ESG) controversies are associated with adverse CEO compensation outcomes and whether these consequences depend on firms' prior ESG orientation. Using 9131 firm‐year observations from listed firms in 11 European countries over 2015–2023, we examine the associations between ESG performance, controversy exposure, and CEO total compensation. The results show that ESG performance is positively associated with CEO compensation, whereas controversy exposure is negatively associated with compensation on average. Importantly, the adverse controversy–compensation association strengthens as ESG performance increases and is concentrated among firms with stronger prior ESG performance. These findings are robust to firm fixed effects, lagged ESG, dynamic‐panel GMM, propensity score matching, a continuous controversy measure, and event‐time analysis. The results are consistent with an expectations‐violation or corporate‐hypocrisy interpretation rather than an insurance‐based view of prior ESG reputation and highlight the importance of credible ex‐post accountability in sustainability‐related executive compensation.