ch7.1berrone_mejia - Academy of Management Journal 2009,...

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ENVIRONMENTAL PERFORMANCE AND EXECUTIVE COMPENSATION: AN INTEGRATED AGENCY-INSTITUTIONAL PERSPECTIVE PASCUAL BERRONE IESE Business School LUIS R. GOMEZ-MEJIA Arizona State University Relying on institutional theory, agency rationale, and environmental management research, we hypothesize that, in polluting industries, good environmental perfor- mance increases CEO pay; that environmental governance mechanisms strengthen this linkage; that pollution prevention strategies affect executive compensation more than end-of-pipe pollution control; and that long-term pay increases pollution prevention success. Using longitudinal data on 469 U.S. firms, we found support for three hypoth- eses. Contrary to our expectations, firms with an explicit environmental pay policy and an environmental committee do not reward environmental strategies more than those without such structures, suggesting that these mechanisms play a merely symbolic role. Because environmental issues are now a major social concern, companies in polluting industries face tight governmental regulations, increased me- dia attention, and strong environmental activism. Firms respond to these external pressures by im- plementing strategies that help promote good envi- ronmental performance and reduce negative envi- ronmental impact (Dowling & Pfeffer, 1975; Hoffman, 2000). The resulting environmental legit- imacy lowers liability exposure, enhances corpo- rate reputation, improves access to resources, and strengthens stakeholder relations (Bansal, 2005; Hart, 1995; Russo & Fouts, 1997; Shrivastava, 1995a). Thus, it makes sense that firms should re- ward their executives for environmental actions that confer greater legitimacy and may directly or indirectly improve firm performance. Only recently have scholars started to analyze the relationship between environmental perfor- mance and executive pay (Coombs & Gilley, 2005; Russo & Harrison, 2005; Stanwick & Stanwick, 2001), and, contrary to the inference drawn above, some of these studies suggest that firms either pe- nalize their managers for environmental initiatives or reward them for poor environmental perfor- mance. In this article, we offer a hybrid framework that draws on institutional theory, agency theory, and environmental management research to better explain the link between executive pay and envi- ronmental performance in polluting industries. We argue that firms that operate in environmentally sensitive sectors 1 but have good environmental per- formance enjoy enhanced social legitimacy and or- ganizational survival capabilities, and reward their CEOs accordingly. That is, they include environ- mental performance as a criterion in incentive schemes for chief executives. Our framework also suggests that firms reward pollution prevention strategies more heavily than “end-of-pipe” pollu- tion control strategies, as the former approach con- fers greater legitimacy within polluting industries than the latter. We further hypothesize that corpo- rate governance structures play an important role in this process—specifically, that the CEO pay–
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ch7.1berrone_mejia - Academy of Management Journal 2009,...

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