Abstract

We investigate the relationship between the CEO incentive structures and the environmental performance of the firm. To measure environmental performance, we use three different proxy variables that are related to the existence of environmental litigation, regulatory compliance issues, and substantial emissions-related controversies. The main finding is that cash-based compensation may have a negative effect on improving the environmental performance of the firm. In addition, we find that CEO incentive structures that encourage a sufficient level of risk-taking may improve environmental performance since it pressures managers to focus on maximizing firm value. The results are consistent with previous studies showing that CEO incentive structures may play a critical role in enhancing environmental performance by incentivizing managers to maximize the shareholders’ wealth.