10 Jan 2013Working Paper Summaries

Pay for Environmental Performance: The Effect of Incentive Provision on Carbon Emissions

by Robert G. Eccles, Ioannis Ioannou, Shelley Xin Li and George Serafeim

Research has shown that reducing carbon emissions and exhibiting good environmental performance are important for corporations. But how exactly are these environmental goals carried out within organizations? In this paper, the authors analyze the incentive structures of climate change management for a sample of large, predominantly multinational organizations. The authors then characterize and assess the effectiveness of different types of incentive schemes that corporations have adopted to encourage employees to reduce carbon emissions. Results suggest that contrary to widespread belief in the effectiveness of monetary incentives, in fact the adoption of monetary incentives is associated with higher carbon emissions. By contrast, the use of nonmonetary incentives is associated with lower carbon emissions. Overall, the study suggests that socially positive tasks significantly impact the effectiveness of different types of incentives and should be considered in the design of accounting and control systems. Key concepts include:

Monetary incentives are associated with higher carbon emissions.
Non-monetary incentives are associated with lower carbon emissions.
When employees perceive their action as socially positive, the adoption of non-monetary incentives might be more effective than monetary incentives in reducing carbon emissions.
For tasks involving socially positive behavior, monetary incentives are not effective and actually detrimental unless they are provided to people for whom such tasks constitute part of their formal job responsibility.

Author Abstract

Corporations are increasingly under pressure to improve their environmental performance and to account for potential risks and opportunities associated with climate change. In this paper, we examine the effectiveness of monetary and nonmonetary incentives provided by companies to their employees in order to reduce carbon emissions. Specifically, we find evidence that the use of monetary incentives is associated with higher carbon emissions. This result holds both in cross-sectional and time-series analysis. Moreover, we find that the use of nonmonetary incentives is associated with lower carbon emissions. Consistent with monetary incentives crowding out motivation for pro-social behavior, we find that the effect of monetary incentives on carbon emissions is mitigated when these incentives are provided to employees with formally assigned responsibility for environmental performance. Furthermore, by employing a two-stage multinomial logistic model, we provide insights into factors affecting companies' decisions on incentive provision, as well as showing that the impact of monetary incentives on carbon emissions remains significant even when we control for potential selection bias in our sample.