The Effect of COVID-19 on the CEO Compensations: From the Perspective of ESG Management

This study examines the CEO compensation design in relation to the ESG management during the COVID-19 period. In the analysis of the exchange traded firms from 2011 to 2021, we show that the CEO pay is positively related with the ESG management both in the level and in its sensitivity with respect to firm performance. Highly rated ESG firms are generally larger, more profitable, and mature firms that manage risks fairly well. COVID-19 shock reduces the profitability of the non ESG participants and the low ESG firms by 40.2% and 18.8%, respectively, while the reduction for the high ESG group is only 7.9%. Jann (2008)’s decomposition method allows us to quantify the pure marginal contribution of the ESG effect after accounting for the difference in firm characteristics. During the normal period, firm characteristics explain 79.3% of CEO pays and the residual 20.7% is attributable to the ESG effect, but this figure increases to 29.8% during the COVID-19 period, which implies that the ESG management can play a more important role in the crisis. The increased pay sensitivity suggests that high ESG firms may apply incentive pay systems more strictly to discipline their CEOs, while the low ESG or non-participating firms are presumably overpaying their managers.