The effect of tournament incentives on environmental, social, and governance (ESG) performance

The recent growth in the practice of incorporating environmental, social, and governance (“ESG”) metrics in executive compensation has been strongly encouraged. According to tournament theory, the disparity in compensation between the CEO and other executives fosters a constructive competitive environment among the executive team, potentially enhancing overall company performance. Prior research has shown mixed results between tournament incentives and corporate social responsibility performance in different countries. The current study revisits the relationship between tournament incentives and environmental, social, and governance (“ESG”) performance. Using 1258 firm-year observations in the U.S. from 2014 and 2016, and 421 firm-year observations in 2021, the central takeaway of this research is to provide evidence that a positive association between compensation packages derived from tournament incentives and ESG performance exists. Our research concludes that higher tournament incentives translate to enhanced environmental, social, and governance performance. Researchers and practitioners interested in the importance of incentive compensation design and achievement of ESG goals should be also interested in this study to better inform their future research and incentive package design.