Do Sustainability Incentives Pay Off? Executive Compensation and Corporate Environmental Outcomes

ABSTRACT

This study investigates whether Sustainability Compensation Incentives (SCI) are effective in improving corporate Environmental Innovation and Product Responsibility, two key dimensions of firm‐level sustainability outcomes. Using panel data from European firms between 2010 and 2024, and applying two‐step system GMM estimations, the study examines the direct effects of SCI as well as the moderating role of Profitability (ROA). The findings reveal that SCI has a positive effect on Product Responsibility but a negative effect on Environmental Innovation, suggesting a divergence in how ESG‐related outcomes respond to incentive structures. Moreover, profitability negatively moderates these relationships; firms with higher ROA exhibit weaker sustainability outcomes from SCI. This moderation effect is stronger in wealthier European countries, while SCI appears to have a more direct and positive impact in less wealthy economies, particularly for innovation. These findings highlight that the effectiveness of SCI is conditional on internal financial performance and external institutional context.