Executive compensation, environmental performance, and sustainable banking: The moderating effect of governance mechanisms

This paper contributes to the extant business strategy and sustainable development literature by investigating the effect of a broad corporate governance disclosure index on executive compensation and, subsequently, determines the extent to which the pay-for-sustainability sensitivity is moderated by corporate governance mechanisms. Employing data collected from 16 Sub-Saharan Africa countries over the period from 2007 to 2018, the findings are as follows: First, we report that better-governed banks pay lower compensation packages to their executives. Second, we find that executive compensation increases sustainable banking disclosures in the countries. Third, the findings show that executive compensation is negatively associated with environmental performance. Finally, we detect that the association between executive pay and sustainable banking performance is significantly moderated by corporate governance mechanisms, revealing that the pay-for-sustainability sensitivity is mainly positive and improves in banks with high corporate governance quality. This implies that the pay-for-sustainability sensitivity is contingent on the quality of the bank's internal governance mechanisms. Our findings have key implications for banking practitioners, regulators, environmental activists, and policy-makers.

Automated summary

This paper investigates the impact of corporate governance disclosure on executive compensation and the moderating effect of corporate governance mechanisms on the pay-for-sustainability sensitivity. The findings reveal that well-governed banks offer lower compensation to executives and that executive compensation is positively associated with sustainable banking disclosures. Furthermore, executive compensation is negatively related to environmental performance. The results also demonstrate that the association between executive pay and sustainable banking performance is significantly influenced by corporate governance mechanisms, indicating that the pay-for-sustainability sensitivity improves in banks with high corporate governance quality.