The use of sustainability incentives in executive remuneration contracts: Firm characteristics and impact on the shareholders’ returns

Abstract

Purpose

The purpose of this paper is to examine which firm characteristics affect the usage of sustainability incentives in executive remuneration contracts, and whether these sustainability incentives have an impact on shareholders’ return.

Design/methodology/approach

The analysis is based on a sample of 212 firms from the FTSE 350 firms over the period of 2009-2011.

Findings

The results indicate that there is a significant relationship between the adoption of sustainability incentives in executive remuneration and firm size, compensation committee independence, the corporate social responsibility (CSR) sustainability committee, CSR sustainability index, and resource efficiency policy variables. Further, there is evidence to support a positive impact on the shareholders’ return.

Research limitations/implications

The results of this study should be interpreted within two limitations. First, the limited numbers of the sample years due to the limited number of firms used sustainability incentives. Second, the use of a dummy variable in the measurement of the adoption of sustainability incentives in the analysis.

Practical implications

The paper includes implications for the development of sustainability incentives within the performance measurement system and compensation contracts that could be a solution for the agency problem.

Originality/value

This study provides empirical evidence on an increased use of sustainability incentives in UK firms, and identifies firm’s characteristics that explain such increase in the sustainability incentives, finally its positive impact on the shareholders’ return.

Citation

Abdelmotaal, H. and Abdel-Kader, M. (2016), "The use of sustainability incentives in executive remuneration contracts: Firm characteristics and impact on the shareholders’ returns", Journal of Applied Accounting Research, Vol. 17 No. 3, pp. 311-330. https://doi.org/10.1108/JAAR-12-2013-0123