Environmental, social, and governance performance and executive compensation: The moderating roles of return on assets and Tobin’s Q—Evidence from Taiwan

Abstract

This study examines whether the within-firm relation between environmental, social, and governance (ESG) performance and executive compensation depends on conventional financial performance. The sample comprises 12,866 firm-year observations for Taiwanese listed and over-the-counter (OTC) firms during 2016–2023. ESG performance is reconstructed from the Taiwan Economic Journal’s (TEJ’s) relative Sustainability Accounting Standards Board (SASB) main-industry ranking, and executive compensation is the natural logarithm of average remuneration for compensated general managers and vice general managers. We estimate firm and year fixed-effects (FE) models with standard errors clustered by firm. Consistent with evidence on the increasing use of sustainability criteria in executive contracts (Cohen et al., 2023; Aresu et al., 2023), ESG is positively associated with compensation in contemporaneous tests. The ESG × ROA (return on assets) coefficient is positive across the baseline, alternative-measurement, sector-year, and lagged specifications. By contrast, ESG × Tobin’s Q is not significant in the joint model. Lagging the regressors removes the direct ESG association but leaves the ROA interaction positive. The evidence, therefore, supports profitability as a conditioning factor, while not establishing a causal ESG-to-pay effect.