Executive Compensation and Misconduct: Environmental Harm

by Dylan Minor

Executive Summary — To what extent does executive compensation push firms into environmental law-breaking in particular and misconduct in general? This study finds that changing a CEO’s compensation from 100 percent stock to 100 percent options resulted in a 60 percent increased odds of environmental harm and close to a doubling of the magnitude of harm. We find similar results for financial accounting misconduct. A rule change making the higher powered incentives more costly for firms to provide reduced incidences.

Author Abstract

We explore the relationship between managerial incentives and misconduct using the setting of environmental harm. We find that high-powered executive compensation can increase the odds of environmental law breaking by 40%–60% and the magnitude of environmental harm by over 100%. We document similar results for the setting of executive compensation and illegal financial accounting. Finally, we outline some managerial and policy implications to blunt these adverse incentive effects.

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