Berrone EnvironmentalPerformanceExecutive 2009

Environmental Performance and Executive Compensation: An Integrated Agency-
Institutional Perspective
Author(s): Pascual Berrone and Luis R. Gomez-Mejia
Source: The Academy of Management Journal , Feb., 2009, Vol. 52, No. 1 (Feb., 2009),
pp. 103-126
Published by: Academy of Management
Stable URL: https://www.jstor.org/stable/40390278
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms
Academy of Management is collaborating with JSTOR to digitize, preserve and extend access to
The Academy of Management Journal
This content downloaded from

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
All use subject to https://about.jstor.org/terms
° Academy of Management Journal
2009, Vol. 52, No. 1, 103-126.
ENVIRONMENTAL PERFORMANCE AND EXECUTIVE

COMPENSATION: AN INTEGRATED
AGENCY-INSTITUTIONAL PERSPECTIVE
PASCUAL BEKRÖNE
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 majoror reward them for poor environmental perfor-
social concern, companies in polluting industries
mance. In this article, we offer a hybrid framework
that draws on institutional theory, agency theory,
face tight governmental regulations, increased me-
and environmental management research to better
dia attention, and strong environmental activism.
Firms respond to these external pressures by im-explain the link between executive pay and envi-
ronmental performance in polluting industries. We
plementing strategies that help promote good envi-
ronmental performance and reduce negative envi- argue that firms that operate in environmentally
ronmental impact (Dowling & Pfeffer, 1975; sensitive sectors1 but have good environmental per-
formance enjoy enhanced social legitimacy and or-
Hoffman, 2000). The resulting environmental legit-
imacy lowers liability exposure, enhances corpo-ganizational survival capabilities, and reward their
CEOs accordingly. That is, they include environ-
rate reputation, improves access to resources, and
strengthens stakeholder relations (Bansal, 2005; mental performance as a criterion in incentive
Hart, 1995; Russo & Fouts, 1997; Shrivastava, schemes for chief executives. Our framework also
1995a). Thus, it makes sense that firms should re- suggests that firms reward pollution prevention
ward their executives for environmental actions strategies more heavily than "end-of-pipe" pollu-
that confer greater legitimacy and may directly or tion control strategies, as the former approach con-
indirectly improve firm performance. fers greater legitimacy within polluting industries
Only recently have scholars started to analyze than the latter. We further hypothesize that corpo-
the relationship between environmental perfor- rate governance structures play an important role
mance and executive pay (Coombs & Gilley, 2005; in this process - specifically, that the CEO pay-
Russo & Harrison, 2005; Stanwick & Stanwick, environmental performance relation is stronger
2001), and, contrary to the inference drawn above, when a firm has in place an environmental pay
some of these studies suggest that firms either pe- policy and an environmental committee within its
nalize their managers for environmental initiatives board of directors. Lastly, we hypothesize that CEO
long-term pay enhances future environmental per-
The authors would like to thank the former editor-in-

chief, Sara Rynes, and four anonymous reviewers for 1 These are firms that manufacture or process more
their insightful comments and suggestions during the than 25,000 pounds and/or use at least 10,000 pounds of
review process. The first author also thanks Andrea substances from a list of chemicals deemed hazardous by
Giuliodori, Judith Walls, Isabel Gutierrez, Josep Tribó, the Environmental Protection Agency (EPA). These firms
and Manuel Núñez Nickel for their encouragement and must report their emissions to the EPA's Toxics Release
advice. Inventory program.
Cop
wri

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
104 Academy of Management Journal February
formance, particularly (Bansal, 2005; Bansal

pollution & Clelland, 2004; Hoffm
prevention re-
2001).
sults, and that the positive effect is greatest where it
is needed the most: whereEnvironmental
industry legitimacy
pollution brings several
inten- adv
sity is at its highest. Ourtages.analysis of longitudinal
For instance, legitimate companies have b
ter exchangetraded
data (1997-2003) on 469 publicly conditions with
firms partners
fromand be
polluting industries in the accessUnited
to resources (DiMaggiosupports
States & Powell, 19
all these hypotheses except which the firmsone
the can allocate to improve envi
concerning
governance structures. mental performance even further by, for exam
Our work contributes to three different branches hiring experts or reacting rapidly in the case o
of business research. First, we combine elements of environmental mishap (Bansal & Clelland, 20
institutional and agency theories to bring a fresh Legitimacy also enables firms to innovate with
perspective into executive compensation research, risk of loss (Sherer & Lee, 2002); thus, good e
which traditionally has overwhelmingly concerned ronmental performers can take better advantag
financial performance (Barkema & Gomez-Mejia, new market opportunities created by the increa
1998; Gomez-Mejia & Wiseman, 1997). Second, we demand for green products and services. Moreo
add to environmental research by recognizing the environmentally legitimate firms run less ris
importance of executive compensation in promot- environmental mishap and thus of legal sanctio
ing good environmental behavior, and we reinforce costly penalties, high insurance premiums, and
the consensus in the field that pollution prevention nificant environmental remediation costs (Godf
strategies tend to be valued more (as reflected in 2005; Khanna & Damon, 1999; Sharma & Vre
higher compensation) than end-of-pipe pollution burg, 1998; Shrivastava, 1995b). Limiting imp
control strategies. Lastly, we contribute to the cor- on the natural environment also isolates a firm
porate governance literature by analyzing whether from stakeholder scrutiny and reduces the risk of
specialized environmental board committees and social sanctions (Oliver, 1991), including negative
CEO pay policies serve to monitor, guide, and re- press and boycotts by environmental activists. En-
ward environmental actions and thus affect the re- vironmentally legitimate firms can attract and re-
lation between environmental performance and tain better partners, customers, and employees than
CEO compensation. poor performers (Buysee & Verbeke, 2003; Hen-
riques & Sadorsky, 1999; Sharma & Henriques,
2005; Turban & Greening, 1997), and thus have less
THEORETICAL FRAMEWORK employee turnover and fewer unproductive associ-
AND HYPOTHESES
ations. Additionally, firms that have implemented
environmental due diligence may incur less risk of
The main thesis of institutional theory is that
community opposition to corporate actions such as
the construction of new plants. Lastly, environ-
organizations enhance or protect their legitimacy
(Scott, 1995) by conforming to the expectations
mental
oflegitimacy reduces idiosyncratic firm risk.
institutions and stakeholders (Aldrich & Fiol,Bansal
1994;and Clelland (2004) showed that environ-
DiMaggio & Powell, 1983). By adhering to institu-
mentally legitimate firms incur lower unsystematic
tional prescriptions, firms reflect an alignment
stock of
market risk than less legitimate firms, so they
corporate and societal values (Meyer & Rowan, have a lower cost of capital. In sum, firms are likely
1977). Thus, concern over legitimacy forces to firms
recognize the value of conformity to environ-
to adopt managerial practices that are expected
mental to
expectations, as the resultant legitimacy re-
have social value (Deephouse, 1999; Scott, duces
1995).the probability of organizational failure
Legitimate actions are defined within a firm's
(Scott, 1995; Singh, Tucker, & House, 1984) and
institutional field, which transcends the industry
may enhance financial performance (King & Lenox,
2002;and
in which the organization directly competes, Klassen & McLaughlin, 1996). Hence, firms
which establishes idiosyncratic rules, belief sys-
in polluting sectors should motivate their CEOs to
tems, and practices deemed to be legitimateengage in strategies to improve environmental
(DiMaggio & Powell, 1991; Scott, 2005). Firms in
performance.
polluting industries are all subject to the sameFrom
reg-the perspective of managers, however, the
ulatory framework and arguably face similar link between environmental actions and financial
media
attention, scrutiny from activists, community performance
con- is not straightforward (Bansal, 2005;
cerns, and changes in consumer preferences; Sharma,
the 2000). For instance, to reduce or eliminate
institutional theory prediction is that companies in emissions, executives may need to imple-
pollution
this strong institutional field will gain legitimacy
ment technologies that may fail or may cause qual-
by exhibiting good environmental performance
ity problems or unforeseen costs, all issues for

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
2009 Berrone and Gomez-Mejia 105
which managers The

are likely
institutional to
prediction discussed be
above is h
(Klassen & Whybark, 1999; Russo
consistent with an agency perspective. Agency
Pollution reduction
scholarsstrategies are
argue that to deal with the classical also
agency
practice, since they require product
problems of moral hazard (unobserved actions by
equipment, and cross-functional
an agent that may be damaging to the principal's em
tion. Moreover, interests)
good environmen
and adverse selection (hidden informa-
may take time totion),
comeprincipals mayto
acquirefruition,
information about the
tainty about outcomes (Aragon-Corr
agent's performance and design a compensation
Correa & Sharma,system
2003; Hart,
based on that 1995; K
information (Eisenhardt,
1999). Managers may therefore
1989; Fama, 1980; Jensen & Meckling, 1976; avoi
Lam-
strategies and allocate resources to m
bert, Larcker, & Weigelt, 1993). Three interrelated
investments. Even when managers
factors should be considered in designing such sys- r
portance of good
tems. environmental
The first is "informativeness" (Holmstrom, p
their firm and its
1979),stakeholders,
or the extent to which the performance they
mea-
to focus on the actions that are easie
sure actually reflects the agent's contribution to the
a way to 'provide cover*
principal's for
welfare. By tying CEO paypoor
to environ- e
mance by appearing to take steps
mental performance, the principal, through the in
tion" (Russo & Harrison, 2005: 588). T
board of directors, can use that indicator to gauge
CEOs to enhance environmental perf
whether or nor the CEO is acting in the best inter-
centive system should reward evide
ests of shareholders. Given their complexity, envi-
mental strategies with potentially high
ronmental strategies are likely to be beyond the
tain, benefits.
expertise of board members, and they may use pay
tied to environmental performance as a substitute
for close vigilance over difficult-to-monitor actions.
Integrating The second factor is "risk
Institutional bearing" (Baker,
and Agenc 1990;
Bloom & Milkovich, 1998; Gomez-Mejia, Perf
Perspectives: Environmental Takacs-
CEO CompensationHaynes, Nunez-Nickel, Jacobson, & Moyano, 2007;
Gray & Cannella, 1997; Miller, Wiseman, & Gomez-
Institutional theory suggests both t
Mejia, 2002), or the extent to which an agent may
efit from conforming to societal ex
incur potential losses in pursuit of performance
that managers have the capacity ("i
Oliver [1991]) and targets the
(such as lower reputation or high employ-
motivation
ment risk [Larraza-Kintana, Wiseman, Gomez-Me-
elty"; Oliver [1997]) to resist the
jia, & Welbourne, 2007]). As agent risk bearing in-
pressures to the extent that there
financial returns. Firms therefore need incentive creases, compensation should increase accordingly
(Bloom & Milkovich, 1998). Environmental invest-
mechanisms to dissuade managers from avoidance.
CEOs who exhibit good environmental perfor- ments are risky, since "there is little reason to be-
lieve that this investment will result in enhanced
mance should be rewarded with higher pay be-
cause on the one hand they are enhancing their short-term profits" (Hart, 1995: 998). Indeed, al-
firms' chances of survival, and on the other hand though there is empirical evidence that good envi-
higher pay will make them less reluctant to engage ronmental performance improves long-term eco-
in environmental actions with uncertain economic nomic performance (e.g., King & Lenox, 2002;
benefits. Use of environmental criteria in executive Klassen & McLaughlin, 1996), studies have also
pay schemes is consistent with findings by institu- shown that environmental performance can impair
tionalist scholars (Peng, 2004; Staw & Epstein, financial results, especially in the short term (Hart
2000) that investors, boards of directors, and their & Ahuja, 1996; Sarkis & Cordeiro, 2001). If CEOs are
compensation committees do use evidence of man- not compensated for the increased risk associated
agerial actions believed to procure legitimacy to as- with environmental investments, they will presum-
sess the effort and value of their top executives, and ably allocate capital into less uncertain alterna-
not just observed economic performance, particularly tives, maintaining their firms' current levels of en-
if the link between actions and results is blurred. vironmental impact and possibly impairing the
"When there is so much ambiguity in attributing the firms' legitimacy. Also, a good CEO may leave for
causes of organizational outcomes such as perfor- a job in a sector less environmentally sensitive,
mance, outside observers often rely on positively val- where the additional effort and risk are not
ued behavior as a signal in making their judgment of demanded.
a firm's management" (Peng, 2004: 458). The third factor is "controllability" (Antle &

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
Demski, 1988; Demski, 1994; Demski & Feltham, The Impacts of Different Environmental
1978), or the extent to which an agent can exert Strategies on CEO Compensation
some influence over a performance criterion. This As we noted earlier, the environmental manage-
means that an "agent should be evaluated and re- ment literature has identified two general types of
warded by a performance measure, if he or she can environmental strategies: pollution control and
control or significantly influence that measure" pollution prevention (Christmann, 2000; Hart,
(Franco, 2007: 51). Because polluting industries are 1995; Klassen & Whybark, 1999; Russo & Fouts,
considered turbulent sectors (Klassen & Whybark, 1997; Sarkis & Cordeiro, 2001). End-of-pipe tech-
1999) in which firms face high governmental scru- nologies capture, treat, and dispose of pollutants
tiny, are subject to media attention, and are recur- and waste at the end of a manufacturing process.
rent targets of environmental activism, financial Focusing on compliance, hazard control, and reme-
performance may experience greater variance than diation, end-of-pipe technologies involve the addi-
in other sectors, and executives may have less in- tion of equipment and devices as the last stage of
fluence over it. In this case, incentives should be production processes and thus do not "require the
closely tied to managerial effort and strategic ac- firm to develop expertise or skills in managing new
tions (Balkin, Markman, & Gomez-Mejia, 2000). Be- environmental technologies" (Russo & Fouts, 1997:
cause environmental strategies are decided by man- 538). In contrast, pollution prevention strategies
agers (Aragón-Correa, Matías-Reche, & Senise-Bamo, minimize or eliminate the creation of toxic chemi-
2003; Sharma, 2000) and are likely to benefit an cal agents during the various stages of production
organization (as we argued earlier), environmental and thus require structural investments in new,
performance may be a reasonable pay criterion.2 cleaner technologies (Klassen & Whybark, 1999;
We therefore propose the following hypothesis: Russo & Fouts, 1997). At the same time, research
has shown that pollution prevention efforts pro-
Hypothesis 1 . Environmental performance has vide organizations with unique advantages (Christ-
a positive effect on CEO total pay. mann, 2000; Hart, 1995; Klassen & Whybark, 1999;
Russo & Fouts, 1997) and may even increase man-
ufacturing performance because they require a fun-
damental rethinking of products and processes that
2 We do not consider the impact of environmental can create opportunities for improvements and inno-
performance on each pay form singly. Rather, we analyze
vation. Klassen and Whybark (1999) found empirical
the influence of environmental performance on CEO total
evidence indicating that pollution prevention strate-
compensation, which includes salary, annual bonuses,
and long-term pay income. This decision follows the gies have a positive impact on manufacturing perfor-
agency rationale that in its total CEO compensation pack- mance, while the opposite was true for end-of-pipe
age, a firm will most likely try to reward its CEO for good efforts. Pollution prevention strategies can also re-
past behaviors in order to reinforce those actions and duce costs through better use of inputs, reduction of
assure their continuance in the future (Gomez-Mejia & waste disposed costs, and removal of unnecessary
Wiseman, 1997). That is, the firm looks back to assess the
steps in production processes. And given that pollu-
CEO's decisions and rewards those actions believed to
tion prevention strategies reduce and eliminate waste
add value to the firm in order to align interests and create
generation, they can potentially cut emissions below
a "common fate" between CEO and firm. Our analysis is
also consistent with the institutional rationale that required levels and thus reduce compliance costs and
boards attempt to justify compensation levels (including
legal liabilities. Empirically, Christmann (2000)
stock options awards) on the basis of past executive found that, in the presence of complementary assets,
decisions deemed legitimate. In our case, we expect pollution
a prevention technologies create a cost ad-
board to consider past environmental activities among vantage. Under the rubric of the resource-based view
of the firm, various authors (Aragon-Correa et al.,
the criteria for assessing a CEO's contributions to their
firm and/or as a criterion to justify pay levels. This en-
2003; Christmann, 2000; Hart, 1995; Klassen & Why-
vironmental performance-reward linkage, in turn, creates bark, 1999; Russo & Fouts, 1997) have argued that
an expectation that in future the CEO will receive greater
because pollution prevention is specific to particular
compensation (including all forms of pay) if environmen-
production processes and requires people-intensive
tal performance remains acceptable or improves. That is,
structures, it is not easily imitable by competitors and
rewarding past performance (for instance, through larger
stock option awards) and hoping for better future perfor-
thus represents a distinct source of competitive ad-
mance (for instance, through stock appreciation) are not vantage. End-of-pipe solutions, on the other hand, are
incompatible objectives but actually complementary. We relatively inexpensive off-the-shelf technologies that
explicitly recognize the incentive role of long-term pay can
in be obtained in the open market, and thus com-
Hypotheses 4a and 4b. petitors can readily copy and implement them.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
2009 Benone and Gomez-Mejia 107
In sum, there is The Moderating

a fair degree of c
environmental Environmental Governance
scholars that poll
strategies are more valuable than e
One way to reward top management for desirable
tions. To the extent that pollutio
behaviors is through a compensation policy that
forts provide greater benefits than
permits considering the value of strategic actions,
nologies, agency theory (via the
not just financial results (what Baysinger and Hosk-
principle discussed earlier) sugge
isson [1990] referred to as "strategic controls"). In-
prevention success should be com
stitutional pressures are likely to influence the
than end-of-pipe pollution cont
presence of such a compensation policy (Gomez-
time, pollution prevention strateg
Mejia & Wiseman, 2007; Lubatkin, Lane, Collin, &
plex and risky than end-of-pipe str
Very, 2007). Boards may consider environmental
technologically complex becau
performance implicitly or explicitly when design-
changes in systems, processes, an
ing an executive compensation policy; by making
gon-Correa & Sharma, 2003); soci
an environmental pay policy explicit, a firm as-
cause they involve diverse stakeho
sumes a public commitment and clearly signals its
levels (Russo & Fouts, 1997); and st
beliefs (Peng, 2004). Gross deviations from that pol-
plex because they require manager
icy would be perceived as hypocritical and thus
and cross-functional coordination
would be likely to impair legitimacy.
1998). Moreover, their systemic a
However, an explicit environmental pay policy
risky investments in low-impac
may not be enough to guarantee that a CEO will
product innovation, and source
value environmental performance. Implementing
cesses. Thus, from an agency per
strategic controls also requires additional informa-
pals should be more inclined to r
tion - much more than is needed for implementing
prevention rather than end-of-pip
financial controls (Baysinger & Hoskisson, 1990).
The same proposition holds from
Incentives based on executives' behavior depend
perspective. It has been argued tha
on a board's knowledge of that behavior (see also
rather than the fact of conformity is
Boyd, 1994; Dalton, Daily, Ellstrand, & Johnson,
be sufficient for the attainment of le
1998; Fama & Jensen, 1983; Jensen & Meckling,
1991: 155). This suggests that CEOs
1976; Lorsch & Maclver, 1989; Mizruchi, 1983).
compliance and meet minimal stan
Conyon and Peck (1998) argued that a compensa-
mental performance
tion committeethrough end-o
within a board of directors is an
which may be more visible than p
important tool for evaluating CEO performance and
tion, in order to manage impression
designing appropriate rewards for top executives.
obligations to external constitue
Baysinger and Hoskisson (1990) also argued that
some authors (Ashforth & Gibbs, 1
board composition may influence the assessment of
stein, 2000; Suchman, 1995) have ar
the strategic value of executive decisions. And al-
ing minimum requirements confer
though forming committees related to certain social
macy, so that "once minimal sta
issues may be a response to institutional pressures
corporations are likely to continue
(Luoma & Goodstein, 1999), these committees may
the best or the most admired" (Staw
also improve firm performance (both socially and
526), and that firms' constituents p
financially) (Greening & Gray, 1994). It is reason-
tive responses
(Suchman, 1995). A
able to expect that when environmental oversight
logic, CEOs who are committed to e
responsibilities are explicitly and formally dele-
cellence (through pollution preve
gated to a subgroup of a board (that is, an environ-
should receive higher pay than t
mental committee),3 the board is in a better posi-
meet minimum requirements. Mor
tion to assess executive performance on the
legitimacy with more substantive, t
environmental dimension (for instance, tracking
strategies (such as pollution preven
relevant pollution data and judging the extent to
ier in a strong institutional field
which executive choices reduce pollution) and to
measures are made public and instit
are steady. Thus,
3 Each firm has its own name for this committee, e.g.,
Hypothesis 2.
Evidence of affairs"
"safety, health and environmental pollutio
or "environ-
strategies has a greater impact
mental compliance." For simplicity, we just call it an
pay than evidence
"environmental of end-of-pi
committee." In all cases, we are referring
control to committees within boards of directors.
strategies.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
consider this assessment Lenox

in CEO pay
(2002), using decisions.
a sample of 614 publicly traded
In the parlance of agencyU.S. manufacturing
theory, firms, found strong
delegating en-evidence
vironmental issues to a that
committee made
a waste prevention strategy leadsup of
to financial
knowledgeable board members should
gains measured reduce
with Tobin's Q. Thus, the
to the ex-
information asymmetriestent between principal
that stocks appreciate and
if firms avoid actions
agent, allowing for a more withaccurate assessment
negative environmental of the
impacts, and/or
the executive's environmental executivesperformance
believe this is the case, CEOs
and should
a
tighter linkage between that performance
make decisions and
that reduce pollution. In addi-
total pay. tion, executives have an incentive to reduce pol-
We therefore expect firms that have a CEO envi- lution in the future to the extent that new stock
ronmental compensation policy and a specialized options may be awarded if environmental perfor-
environmental board committee to tie executive pay
mance improves.
more strongly to environmental performance. And Furthermore, Sanders and Hambrick (2007) re-
given the arguments underlying Hypothesis 2, we
ported that stock option pay was positively asso-
expect this moderating effect to be stronger for ev-
ciated with greater levels of investment in risky
idence of pollution prevention strategies than for
long-term projects such as R&D, capital equip-
evidence of end-of-pipe pollution control. Thus,
ment purchases, and acquisitions. Since good en-
Hypothesis 3a. The positive effect of environ- vironmental performance, particularly pollution
mental performance on CEOs' pay is higher for prevention, requires a multiyear commitment to
firms that have environmental governance demanding and risky environmental strategies, to
mechanisms in place. the extent that long-term pay reinforces those types
Hypothesis 3b. Firms with environmental gov- of behaviors, it should improve environmental per-
ernance mechanisms in place put greater em- formance. Given that pollution prevention is more
phasis on pollution prevention than on end-of- valuable to firms than end-of-pipe and should be
pipe pollution control as a criterion for rewarded accordingly (as per Hypothesis 2), we
CEO pay. would expect that executives receiving long-term
income would tend to devote more attention to
improving pollution prevention results than to im-
The Influence of Long-Term Pay on Subsequent
Environmental Performance proving end-of-pipe results.
Long-term pay forms, like stock options, are ex- Hypothesis 4a. Long-term pay has a positive
plicit incentives, since their final value is contin- effect on subsequent environmental perfor-
gent on future performance (Murphy, 1999); they mance. This positive effect is greater on pollu-
are intended to align the interests of managers and tion prevention than end-of-pipe results.
shareholders (Fama & Jensen, 1983; Jensen & Meek-
ling, 1976; Jensen & Murphy, 1990) and induce The more polluting a firm's industry is, the more
managers to actively seek business opportunities likely it is that environmental initiatives will bring
and make strategic investments. In polluting indus- strategic advantages. Other things being equal, the
tries, managers who receive long-term pay contin-
value of long-term pay for the executive should
gent on the future value of their companies are increase in tandem with those environmental ef-
likely to perceive the potential value of green prac-
forts. That is, when executives operate in highly
tices more easily, because good environmental be-
polluting industries, then long-term incentives are
haviors are widely believed to have an enduring
more likely to have a beneficial effect on their
impact on performance (Hart, 1995; Russo & Fouts,
1997). Klassen and McLaughlin (1996) used event firms' environmental performance. And, given our
study methodology to gauge investor reactions to previous arguments, CEOs should place greater em-
news about environmental performance awards phasis on obtaining high pollution prevention
and environmental crises. These authors found sig- marks than on end-of-pipe success. Thus,
nificant, positive returns for firms with strong en-
vironmental management and significant, negative Hypothesis 4b. Long-term pay has a greater
returns for firms with weak environmental manage- effect on subsequent environmental perfor-
ment. Dowell, Hart, and Yeung (2000) also found mance as a firm's presence in polluting indus-
that large companies that adopt strict global envi- tries increases. This positive moderating effect
ronmental standards are rewarded with higher is greater for pollution prevention than end-of-
stock market performance. More recently, King and pipe results.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
METHODS pendix A provides a detailed description of the

number of firms, years, and observations.
Sample and Data Collection
Data on an institutional field should represent
Measures
firms facing similar institutional pressures (Hoff-
man, 2001). Given that government is one of Compensation
the measures. Our dependent vari-
most prominent sources of such pressures,able
we for Hypotheses 1-3, CEO total pay, consiste
chose to focus on firms from industries subjectof to
the sum of salary, bonus, and all long-term com-
reporting under the EPA's Toxics Release Inven- of CEO pay (stock options, restricted stock
ponents
and aother long-term compensation). Total long-
tory, a program that requires facilities exceeding
threshold level to report their emissions. These
term pay was used as an independent variable in
testing Hypotheses 4a and 4b. In all cases, we use
firms are all subject to the same regulatory frame-
the natural logarithm of compensation to reduc
work and arguably face similar media attention,
scrutiny from activists, community concerns,heteroscedasticity.
and In keeping with much of the
changes in consumer preferences. We collectedexecutive compensation literature, we valued stock
data on these firms for CEO pay, CEO tenure, options
and at the time they were awarded. To value
CEO duality (in which the CEO doubles as the options, two general methods are available
stock
One is the Black-Scholes method, which uses a
board chair) from the ExecuComp database, a prod-
uct of Standard & Poor's that includes several CEO
sophisticated model to estimate the value of this
type of compensation. Many studies of executive
compensation items for companies included in the
S&P 1500 index and that is extensively used in compensation (Balkin et al., 2000; Finkelstein &
compensation research. We initially identified Boyd, 1998; Gomez-Mejia, Larraza-Kintana, &
1,071 companies with data for the period 1997- Makri, 2003; Henderson & Fredrickson, 1996, 2001)
2003. After subtracting companies with missing have used a second method, proposed by Lambert
values for some of these variables, cross-referenc- and colleagues (1993), that values stock options at
ing to the Compustat database for information on 25 percent of their exercise value. We selected the
firm size, financial performance, and industry, and latter method over the former for several reasons.
matching with the Investor Responsibility Research First, in some cases, Black-Scholes values were not
Center (IRRC) database for information on board reported in ExecuComp even when stock options
structure, family firm status, and CEO and direc- were granted. Second, in our sample the correlation
tors' ownership, we were left with 823 companies. between the values yielded by the two methods
We then gathered environmental governance infor- was very high (.97), as it has also been in previous
mation from proxy statements reported to the Se- research (Finkelstein & Boyd, 1998; Lambert et al.,
curities and Exchange Commission (SEC). As noted 1993). Lastly, and most important, separate analy-
later, we used firm fixed-effects estimation models, ses using Black-Scholes values yielded results al-
which require mean-deviating the sample (i.e., ad- most identical to those reported here.
justing each observation by its within-firm mean). Environmental performance. Use of TRI data is
Thus, we needed data on each firm for at least two well established in management research on envi-
years; otherwise, units would be dropped out of the ronmental impacts of corporations (e.g., King &
fixed-effects estimator (Wooldridge, 2002). This re- Lenox, 2002; Klassen & Whybark, 1999; Russo &
quirement reduced the sample to 762 firms. Fur- Harrison, 2005). Under EPA's Emergency-Right-to-
thermore, only firms that manufacture or process Know Provision, industrial facilities with ten or
more than 25,000 pounds and use at least 10,000 more full-time employees that release any listed
pounds of any of the EPA's listed chemicals are toxic substance in excess of the minimum reporting
required to report their emissions to the TRI pro- threshold via any of four different media (air, wa-
gram. In the end, we found environmental data for ter, land, or underground injection) are required to
at least two years for 469 publicly traded compa-
nies, which constituted our final unbalanced panel
sample (92%) belonged to either the high or medium
and represented 2,088 firm-year observations.4 Ap-
group. We followed a similar comparison procedure us-
ing the classification made by Smarzynska and Wei
(2001), who used a combination of abatement costs and
4 To analyze how representative of polluting indus- emission data to classify industries at the three-digit SIC
tries our sample was, we ranked industries defined at the code level. Approximately 80 percent of our firms then
two-digit SIC code level on total emissions and divided belonged to the high- and medium-polluting sectors.
them into three groups (high-, medium-, and low-pollut- These results suggest that our sample was representative
ing). Four hundred and forty-nine of the 469 firms in our of polluting industries in the United States.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
create ourof
report the type and amount pollution prevention measure,to
emissions we esti-
the EPA
mated total
(EPA, 2002). Early studies simplywaste generation levels and the
used later con- sum o
annual emissions of all TRI substances released in trasted this estimate with real values. Given that
facilities must report their production ratios for a
a given year as a proxy for a firm's potential harm to
human health or the environment (e.g., Khanna current& reporting year as compared to the previous
Damon, 1999). However, total quantity of emis- reporting year (i.e., the ratio of the production vol-
ume in t + 1 to the production volume in £), we
sions is not the same as exposure to harm, for either
the public or the ecosystem (EPA, 2002). Recently, used these values to estimate waste generation fol-
some studies have tried to mitigate this shortcom-lowing several steps.6 First, we weighted each
ing by weighting emissions, using "reportable
chemical by its HTP value (as described in Appen-
quantities" (RQs) to account for the toxicity levels dix B, part 1); second, we aggregated the results
of chemical agents (e.g., King & Lenox, 2000, 2002; across chemicals at the facility level (see Equation
Russo & Harrison, 2005). But Toffel and Marshall Bl); third, we multiplied these results by their cor-
(2004) argued that RQs are problematic for several responding production ratios; fourth, we aggre-
reasons. First, the discrete scale of RQs reduces gated results by parent company; and finally, we
their precision. Second, there is only one RQ value compared these results against real values. The for-
for each chemical agent, regardless of the medium mal procedure for calculation can be found in Ap-
in which it is released (air, water, land). Third, it is pendix B, part 2. Because the HTP method offers
hard to determine the bases on which the toxicity cancer and noncancer values, we calculated the
level for a particular chemical was established (Tof- formulas given in Appendix B, part 2, using these
fel & Marshall, 2004). To address these drawbacks, values separately and obtained two different pollu-
we weighted chemicals using the "human toxicity tion prevention indexes. Given that these variables
potential factor" (HTP) developed by Hertwich and were highly skewed (mean = 6.88e+ 10; s.d. =
colleagues (Hertwich, Máteles, Pease, & McKone, 1.69e+ 12; yl = 31.02 for carcinogen values, and
2001), which measures toxicity in terms of benzene mean = 2.22e+ 13; s.d. = 7.01e+ 14; yl = 38.47 for
equivalence (for carcinogens) or toluene equivalence noncarcinogen values), we log-transformed them to
(for noncarcinogens). This method assigns each achieve normality. Later, we calculated their reli-
chemical separate HTP values for different media of ability and, given their high Cronbach alpha value
release. The results are more closely associated with (a = .96), standardized and averaged both measures
actual risks to human health. The HTP procedure is to create our final pollution prevention variable.
more precise than that for RQs, and HTP results are Our second environmental performance measure
highly correlated with those obtained with more so- was end-of-pipe pollution control. Following pre-
phisticated weighting methods such as the EPA's vious environmental research (e.g., King & Lenox,
"risk-screening environmental indicator" (r = .73) 2001, 2002, 2004; Sarkis & Cordeiro, 2001), we
and the "ecoindicator99" (r = .92) (Toffel & Marshall, defined this variable as a ratio in which the numer-
2004). Thus, before calculating our environmental ator was the sum of chemicals recycled, treated
measures, we weighted the quantity of each chemical on-site, and transferred to other locations for fur-
generated over a given year by its correspondent HTP ther treatment, and the denominator was the total
value. (See Appendix B, part 1, for the formal calcu-
waste generated by a firm. This calculation is con-
lation procedure.) In accord with previous research sistent with the definition given by the EPA (1997),
(King & Lenox, 2000, 2002, 2004), we considered only
which defines end-of-pipe technologies as methods
chemicals that were consistently reported on over our
used to remove already formed pollutants from a
period of analysis and were included in the HTP list.
stream of air, water, waste, product, or similar me-
The HTP covers 268 chemicals that EPA has consis-
dium. We weighted chemical figures by the average
tently reported on and that represented 79 percent of
HTP values before calculating the ratio. Again, we
the TRI releases to air reported in 1997 (Hertwich et
computed the reliability between cancer and non-
al., 2001).
cancer figures. Because the Cronbach alpha coeffi-
Of our two environmental performance mea-
cient was fairly high [a =.79), we combined those
sures, the first, pollution prevention strategies, has
two figures into a single end-of-pipe composite by
been traditionally measured as the difference be-
standardizing and averaging them.
tween a predicted value and some actual pollution
level (King & Lenox, 2000, 2002).5 Accordingly, to
6 Production ratio values often vary around 1. For in-

5 We were not able to replicate King and Lenox's mea- stance, a ratio of 1.1 would indicate a 10 percent increase
sure because facility-level data were not available. in production.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
Environmental each
governance. Toof de
firm, with a 2 indicating the presence
able (see Hypotheses 3apayand
both an environmental 3b),
policy and an envi- w
ronmentaleach
proxy statements committee). company
time period to
identify
All reports were codedwhether
by one of the authors. To ea
environmental pay
check for potential bias derived from and
policy a single rater an
committee within its board. To determine the exis- and to test for reliability, we randomly selected a
tence of an explicit environmental pay policy, we sample of 300 paragraphs for coding by an inde-
followed a three-step process. First, we defined a pendent researcher with knowledge in the area of
list of keywords representative of both pay and executive compensation. We then compared this
environmental issues. Our environmental word list researcher's codes with those of the original rater
included the keywords used in the work of Bansal and calculated interrater reliability using Co-
(2005) - "sustainable development," "environ- hen's kappa, obtaining highly satisfactory results:
ment," "pollution," and "toxic" - in addition to 0.90 for the case of environmental pay policy and
keywords from other papers cited in this article: 0.92 for environmental committee. Hence, we
"hazardous," "waste," "disposal," "alternative en- deemed it safe to use only the codes from the
ergy," "ecology," and "contamination." The pay primary coder, which allowed us to code the
word list included the terms "pay," "compensa- entire sample consistently within resource con-
tion," "salary," "wage," "reward," "remuneration," straints (Bansal, 2005).
"incentives," "bonus," "stock," and "income." As a Control variables. We used a comprehensive set
second step, we identified all paragraphs within of control variables. The first two are the most
the proxy statements that contained any word(s) widely recognized determinants of CEO pay,
from the environmental list plus any word(s) from namely, firm size and firm performance (Tosi,
the pay list. In all, 100 dyadic combinations were Werner, Katz, & Gomez-Mejia, 2000). We captured
possible. firm size as the logarithm of a firm's total assets
Our large amount of data (5,053 text files, over (Bloom & Milkovich, 1998; Finkelstein & Boyd,
1.5 gigabytes) made this task more difficult and 1998). We measured financial performance as a
tedious than we originally anticipated it would be. firm's annual return on equity (ROE) (Finkelstein &
We used the Find in Context, from iNetPrivacy. Boyd, 1998; Sanders & Carpenter, 1998). We also
Software (2004) and programmed it to search text measured market-based performance using Tobin's
blocks that contained combinations of words in Q, calculated by dividing the sum of firm equity
both lists within a range of 500 characters. If avalue, book value of long-term debt, and current
positive match was found, the software would ex- liabilities by total assets (Chung & Pruitt, 1994;
Makri, Lane, & Gomez-Mejia, 2006). In keeping
tract a 5,000-character text block for further analy-
sis. To maximize results and gain precision, we with relevant work on executive compensation, we
included variations of a stem (e.g., "environment," controlled for two measures of CEO power and
"environmental," "environmentally"). In the third influence. The first was CEO ownership, or the
step, we visually inspected each text block and percentage of ownership stake its CEO had in a
coded either 1, for an explicit relationship betweenfirm, which some researchers have used as a proxy
executive pay and environmental performance, or for CEO power (Finkelstein, 1992; McEachern,
0, for the absence of such a link. We then created 1975).
a The second was CEO tenure, or the number
dummy variable with a value of 1 if a firm's proxyof years an incumbent CEO had worked for the
statement contained at least one text block coded 1 current firm as CEO, which some scholars have
and 0 otherwise. To identify the presence of an interpreted as a proxy for CEO entrenchment (Go-
environmental committee, we followed an identi- mez-Mejia, Nuñez-Nickel, & Gutierrez, 2001; Hill &
cal procedure. In this case, dyadic relationships Phan, 1991).
were between the items in the environmental Another set of four control variables accounted
word list and the word "committee." Paragraphs
for governance structure. First, we controlled for
were individually inspected to determine the proportion of outside directors, measured as the
whether or not a company had a committee re- ratio of outside board members to the total number
sponsible for environmental issues. We then cre- of board members. This measure is often used as an
ated a dummy variable coded 1 if such a commit- indicator of board independence (Baysinger, Kos-
tee was present and 0 otherwise. We compiled nik, & Turk, 1991; Westphal & Zajac, 1994). Sec-
our final environmental governance measure by ond, we considered director ownership, a proxy for
adding the two dummy variables for environmen- board and firm having a "common fate" (Boyd,
tal pay policy and environmental committee (so 1994). This was measured as the percent ownership
effectively this composite had a 0-2 range for stake of directors, excluding the CEO's share.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
Third, we included CEO to pollute more and

duality, theconsequently exhibit worse
situation in
which the same individual is both CEO and board environmental performance. Regulatory intensity
chair, which purportedly reduces board indepen- was expected to positively influence environmen-
dence (Boyd, 1994; Westphal & Zajac, 1994). This tal performance. Following Kassinis and Vafeas
was measured as a dummy variable coded 1 if a (2002), we estimated this variable as the total emis-
CEO held both positions and 0 otherwise. Lastly, sions of the state in which a firm had its headquar-
we controlled for family firm status, as this variable ters, deflated by total employment in each state
has been found to influence CEO pay (Gomez-Mejia (from the U.S. Census Bureau), log-transformed and
et al., 2003; McConaughy, 2000). This dummy vari- inverted.
able assumed a value of 1 if at least one board
member of a firm had a family relationship with Estimation
the Methods
CEO and was 0 otherwise.
To control for the possibility that firms may im- Because our data set has observations of multiple
prove their environmental performance simply by firms over different points in time, the use of time
divesting from highly polluting sectors, we createdseries cross-sectional data analysis techniques was
an industry pollution position index that reflectsappropriate to test our hypotheses (Greene, 1993;
the mix of sectors in which a firm operates and Wooldridge, 2002). We used a fixed-effects model
accounts for their pollution intensity. The proce-with White's correction, which solves some het-
dure to calculate this index appears in Appendixeroskedasticity problems (White, 1980). A fixed-
B, part 3. We expected this index to be inverselyeffects model is equivalent to adding a dummy
related to our environmental measures. That is, variable for each firm (Greene, 1993); it has the
firms with greater presences in highly polluting advantage of explicitly modeling features that are
sectors should exhibit worse environmental unobservable but stable over time and their possi-
scores. Lastly, we controlled for the number ble of
correlation with explanatory variables. Fixed-
reporting plants owned by a firm, as this might models incorporate computational routines
effects
affect overall end-of-pipe and pollution preven- that effectively handle many potential statistical
tion scores; this number was gathered from problems
the such as multicollinearity and protect
TRI database.7 against spurious results from the problematic er-
Hypotheses 4a and 4b have environmental per- ror terms typically found in traditional cross-
formance as their dependent variable, so we in- sectional studies (Hsiao, 1985). They are consid-
cluded an additional set of control variables that ered conservative because only changes in
might influence environmental performance; we independent variables within a firm can produce
also lagged all control variables for Hypotheses 4asignificant effects. We used a one-year-lag model
and 4b by one year. The additional controls are as because most of the firms based their incentives
follows: Age of assets was approximated by theon annual results. In all cases, we used standard-
ratio between gross and net assets (Shameek & Co- ized variables. We included year dummy vari-
hen, 2000). Arguably, firms with older plants tendables to eliminate year-specific heterogeneity.
Thus, our models control for both firm-specific
and time-specific effects.
We applied several statistical methods to assure
7 To estimate the percentage of plants sold each year,
we listed the facilities that exceeded the high-pollution the robustness of our sample. First, given the un-
threshold established by calculating the average emis- balanced nature of our sample and the use of fixed-
sion level of all facilities and adding to it one standard effects models, sample bias was a concern. To ad-
deviation. Then we calculated the percentage of those dress this issue, we followed the method proposed
facilities that remained in a firm over time. From year to by Wooldridge (2002), who argued that in a fixed-
year, an average of approximately 85 percent of the facil- effects model with an unbalanced panel, sample
ities remained under the control of the same firms (which bias is not a problem unless the selection is corre-
means that from year to year, an average of 15 percent lated to the idiosyncratic error term of the model.
were either closed or sold). For the entire period of anal- To test this assumption, we added a selection indi-
ysis (seven years), about 60 percent of the facilities clas-
cator with a one-period lag. This indicator reveals
sified as high emitters remained in the sample. This does
which time periods are missing for each firm. For
not mean that high polluters sell plants at a faster rate
than low polluters. To test that possibility, we conducted each period, this variable assumes the value 1 if a
firm is included in the estimation and 0 otherwise.
an unreported analysis comparing the selling rates of
high and low polluters and found no statistically signif- Thus, the selection indicator models the presence
icant differences between these two groups (see the Dis- or absence of firms in each time period. In our
cussion for more on this issue). estimations, this selection indicator was not signif-

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
icant,8 whichthat
indicating applies when aimbalance
dependent variable is con- i
not lead to bias tinuous but bounded (Wooldridge, 2002). Fixed-
(Wooldridge, 200
A second effects Tobit models
concern was can be calculated,
the but esti-pot
bias from mates are inconsistent
omitting (Heckman & MacCurdy,
companies th
the TRI threshold. To address this concern, we 1980). Thus, we calculated a random-effects Tobit
considered the larger sample (762 firms) and fol- model, which is more adequate since it does give
lowed the two-stage procedure suggested by Heck- consistent estimates for betas (Robinson, 1982).
man (1979). Results from this estimation showed
no evidence of sample selection bias, and thus no RESULTS
corrections were needed in the models.9
When testing Hypotheses 4a and 4b (the impact Table 1 reports descriptive statistics and correla
of long-term pay on environmental performance), tions for the variables used in this study. Untran
we calculated two models: one with our pollution formed values for CEO total pay averaged $5,774,0
prevention measure as dependent variable and the and long-term pay averaged $4,445,000. The high
second with our end-of-pipe measure as dependent correlation in Table 1 is between these two vari-
variable. When testing Hypothesis 4b (the impact of ables, indicating a strong linear relationship. Al-
long-term pay on environmental performance as though this correlation value is clearly high, it is
the industry polluting position increases), we in- at levels obtained in other studies analyzing ex-
cluded an interaction term that was the cross-prod- ecutive pay (Coombs & Gilley, 2005; Henderson &
uct between industry pollution position and our Fredrickson, 1996).
environmental performance measures. Table 2 reports the results of the fixed-effects
For testing Hypotheses 4a and 4b, we adjusted a models used to test Hypotheses 1 and 2, regarding
fixed-effects model as described above. As an ad- the influence of environmental performance on
ditional analysis and in order to check again for CEO pay and the importance of different environ-
potential sample selection bias, we used Tobit anal- mental strategies for CEO pay, respectively. Model
ysis, since these models have the advantage of us- A presents our control variable results. As we ex-
ing data from the nonreporting firms. To conduct pected, firm size, financial performance, and CEO
this analysis, we considered our full sample of 762 duality were positively and significantly associated
firms (both reporting and nonreporting). Thus, we with CEO total pay. CEO ownership, however, was
had to account for the fact that, for nonreporting negatively related to CEO total compensation.
firms, environmental values were missing. Follow- Models B and C measure the impact of pollution
ing previous environmental research (Klassen & prevention (PP) and end-of-pipe pollution control
Whybark, 1999; Russo & Harrison, 2005), we de- (EOP), respectively, on CEO total pay. Each had a
cided to use the highest value of environmental positive and significant effect on CEO total pay (PP,
performance for nonreporting firms. As a result, p < .01; EOP, p < .05), providing strong support for
our dependent variables in this case (pollution pre- Hypothesis 1, which predicted that environmental
vention and end-of-pipe) were continuous but cen- performance would be positively associated with
sored at the maximum values. Following Russo and CEO total pay. Model D includes both pollution
Harrison (2005), we used a censored Tobit model, prevention and end-of-pipe environmental perfor-
mance measures in the same equation; only pollu-
tion prevention was statistically significant (p <
8 We also identified those firms for which there was a .01), in line with Hypothesis 2, which predicted that
gap in the environmental data (that is, environmental pollution prevention would have a higher impact on
data were missing for at least one year) and reran our CEO pay than end-of-pipe pollution control. In addi-
models excluding them from the estimations. Results tion, we conducted an analysis on the increments in
from these new estimations were fully consistent with iî2, a measure of explained variance, to confirm this
those presented in this article. result. We tested the increment to R2 with the pollu-
9 Detailed explanation of the Heckman's estimation tion prevention variable first and the end-of-pipe
and its results are available from the authors upon re- variable later. In the first case (pollution prevention),
quest. It should be noted that a limitation of this proce- the increment was 2 percent, while in the second case
dure is that the actual selection may occur at the facility
(end-of-pipe), it was 1 percent. When including both
level. However, owing to the lack of information at the
measures in the model, the R2 increment was 2 per-
facility level, analysis was performed at the firm level. In
addition to this test, we conducted a separate analysis cent, with the pollution prevention variable being
including a dummy variable that assumed the value 1 if significant and the end-of-pipe variable, nonsignifi-
a firm reported its emissions and 0 otherwise. As we cant. Together, these results suggest that adding the
expected, this variable was negative and significant. end-of-pipe measure to the model does not add sig-

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
TABLE 1
Descriptive Statistics and Correlations0

Variables Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1. Total payb 13.67 2.45

2. Long-term payb 6.87 2.12 .87
3. Firm size (assets)b 7.92 1.45 .47 .38
4. Firm financial performance 11.66 34.94 .15 .14 .09
(ROE)
5. Tobin's Q 1.30 1.31 .25 .31 -.04 .20
6. CEO duality 0.50 0.50 .29 .23 .09 .03 -.05
7. CEO ownership 1.80 6.51 -.15 -.16 -.17 -.02 -.03 .07
8. CEO tenure 4.90 6.24 .10 .07 -.18 -.06 .04 .37 .22
9. Proportion of outside directors 81.47 12.38 .15 .11 .12 -.01 -.07 .11 -.16 -.13
10. Director ownership 4.58 12.66 -.07 -.05 -.11 .01 -.02 -.05 .14 .06 -.15
11. Family firm status 0.09 0.28 -.14 -.12 -.08 -.02 -.06 -.06 -.10 .05 -.10 .25
12. Pollution prevention -0.09 1.01 -.01 .01 -.14 -.02 .06 -.03 .08 .07 -.04 .02 .02
13. End-of-pipe pollution control 0.05 0.88 .03 .05 -.17 .05 .21 -.08 .06 .02 -.08 .01 .02 .08
14. Age of assets 0.24 0.47 .12 .11 .08 .11 -.02 .12 -.01 .03 .04 -.03 -.03 .01 -.01
15. Environmental governance 0.23 0.47 .11 .06 .31 -.02 -.13 .08 -.09 -.14 .14 -.10 -.07 -.09 -.12 -.03
16. Regulatory stringency 0.54 3.58 .19 .17 .06 .01 .11 .10 .06 .13 -.02 .03 -.02 .18 .19 .04 -.05
17. Industry pollution position 16.20 6.28 -.07 -.06 .06 -.01 -.07 .02 -.05 -.03 -.03 -.09 -.03 -.07 -.21 -.06 .13 -.06
18. Reporting plants 11.28 14.80 .14 .11 .46 .00 -.15 .05 -.11 -.14 .09 .01 -.01 -.17 -.02 .07 .29 .09.14
a n = 2,088. Correlations above .03 or below -.03 are significant at the 5 percent level.
b Logarithm.
interaction term for environmental governance

nificantly more explanatory power than the pollution
prevention measure by itself, providing support mechanisms
for and pollution prevention strategies
Hypothesis 2. was negative and moderately significant (p < .10).
Following previous environmental studies (Ara-Also, contrary to our expectation, firms with envi-
gon-Correa, 1998; Russo & Fouts, 1997), we con- ronmental governance mechanisms in place do not
ducted F-tests to examine the explanatory valuerely
of on evidence of end-of-pipe pollution control
our independent variables. Results of these tests
strategies as a criterion for CEO pay. In all cases, fl2
increments were below 1 percent, and results of
indicated that the increments in variance explained
between the control model and the full models F-tests indicated that the increments in variance
explained between models were not significant.
were all significant. This suggests that although the
increase in variance was modest, the impact of The exception was the increment in fl2 between
environmental performance on CEO compensation models B and C, which was moderately significant
was not due to random chance. In addition, it (p < .10). As a whole these results fail to support
should be noted that the increments in explained both Hypothesis 3a and Hypothesis 3b.10
variance are comparable to those obtained in other Tables 4 (with pollution prevention as depen-
compensation studies (e.g., Bloom & Milkovich, dent variable) and 5 (with end-of-pipe pollution
1998; Miller et al., 2002). control as dependent variable) summarize our anal-
Table 3 shows results for Hypotheses 3a and 3b, yses for testing Hypotheses 4a and 4b (the impact of
which predicted that environmental governance long-term pay on subsequent financial perfor-
mechanisms would moderate the relationship be- mance). To account for the fact that it may take
tween environmental performance and CEO pay some time for managers to improve environmental
and that this moderating effect would be greater for performance, and for the probability that incentives
pollution prevention outcomes than for end-of- already awarded may still convey incentive power
pipe results. Following recommendations of Aiken in later years, we used the average value of long-
and West (1991) for reducing potential collinearity, term pay for two previous years. Model A of Table
we centered the environmental governance and en- 4 includes only our control variables for a fixed-
vironmental performance variables. We also calcu-
lated the variance inflation factor (VIF) after each
regression to see whether results were subject to 10 We also calculated our models using two dummy
multicollinearity. Values were within acceptable variables, one for explicit environmental pay policy and
limits, indicating that estimations were free of any another for environmental committee. Results of individ-
significant multicollinearity bias. Contrary to Hy- ual effects and three-way interactions are consistent with
pothesis 3a, findings in model C show that the those presented in this article.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
TABLE 2
Results of Fixed-Effects Panel Data Analyses on CEO Total Pay*
Variables Model A Model B Model C Model D
Controls
Firm size (log assets) 0.61*** (0.10) 0.61*** (0.10) 0.59*** (0.10) 0.62*** (0.10)
Firm financial performance (ROE) 2.89*** (0.72) 2.87*** (0.71) 2.57*** (0.62) 2.88*** (0.71)
Tobin's Q 0.24*** (0.03) 0.24*** (0.03) 0.26*** (0.03) 0.25*** (0.03)
CEO duality 0.09*** (0.02) 0.09*** (0.02) 0.08*** (0.02) 0.08*** (0.02)
CEO ownership -0.09*** (0.03) -0.09** (0.03) -0.05+ (0.03) -0.09** (0.03)
CEO tenure -0.09 (0.15) -0.10 (0.15) -0.08 (0.14) -0.08 (0.15)
Proportion of outside directors -0.02 (0.01) -0.01 (0.01) -0.02 (0.01) -0.01 (0.01)
Director ownership -0.01 (0.01) -0.01 (0.01) -0.00 (0.01) -0.01 (0.01)
Family firm status -0.02 (0.02) -0.02 (0.02) -0.01 (0.01) -0.02 (0.02)
Industry pollution position -0.01 (0.03) -0.01 (0.03) -0.01 (0.02) -0.01 (0.02)
Reporting plants 0.01 (0.04) 0.01 (0.04) -0.01 (0.04) 0.01 (0.03)
Main effects
Pollution prevention 0.03** (0.01) 0.03** (0.01)
End-of-pipe pollution control 0.04* (0.02) 0.03 (0.02)
F 23.15*** 20.15*** 22.80*** 19.88***

R2 .34 .36 .35 .36
Afl2 .02 .01 .02
AF 8.20** 2.55* 11.06*
a n = 2,088. Table contain

that are not shown becaus
+ p< .10
* p < .05
** p < .01
***p< .001
Two-tailed tests.
effects model. Contrary to previous research (Grant, ables and, as with the fixed-effects model, reporting
Jones, & Bergesen, 2002), firm size was not related plants, regulatory stringency, and family firm sta-
to pollution prevention performance, but the report- tus were all significant, but the level of their signif-
ing plants variable (also a proxy for size) was nega- icance increased considerably (p < .001). As we
tively and significantly related to pollution preven- expected, the influence of industry pollution posi-
tion as well as to the industry pollution position of a tion on pollution prevention performance was neg-
focal firm. Regulatory stringency, Tobin's Q, and fam- ative and highly significant. Model E again con-
ily firm status, on the other hand, were positive and firms Hypothesis 4a, showing a positive and
slightly significant. Model B shows that long-term moderately significant (p < .10) coefficient for the
pay had a positive and highly significant impact on effect of CEO long-term pay on pollution preven-
subsequent pollution prevention performance (p < tion performance. Lastly, the interaction between a
.01), strongly supporting Hypothesis 4a. firm's industry pollution position and long-term
Model C of Table 4 includes the interaction term pay (model F) is positive and highly significant for
between industry pollution position and long-term pollution prevention performance (p < .01), con-
pay, which is positively and moderately significant firming Hypothesis 4b. Again, VIF values were
(p < .10). In accord with Hypothesis 4b, this finding within acceptable limits, indicating that estima-
suggests that the positive impact of long-term pay on tions were free of any significant multicollinearity
subsequent environmental performance is greater for bias. This result indicates that the impact of long-
firms operating in the highest-pollution sectors. term pay on subsequent pollution prevention is
In models D, E, and F of Table 4 we ran the same stronger as a firm's presence in highly polluting
models as before but used a Tobit model with ran- sectors increases, supporting Hypothesis 4b. Figure
dom effects, which allowed us to control for poten- 1 visually depicts this relationship. Again, F-tests
tial selection bias (i.e., to account for the potential confirmed the strong significance of our explana-
impact that omitting nonreporting firms might have tory variables.
on our analysis). Model D contains the control vari- Turning our attention to Table 5 (which provides

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
TABLE 3
Results of Fixed-Effects Analysis of the Moderating Role of Environmental Governance3
Variables Model A Model B Model C Model D
Controls
Firm size (log assets) 0.62*** (0.10) 0.62*** (0.10) 0.62*** (0.10) 0.62*** (0.10)
Firm financial performance (ROE) 2.88*** (0.71) 2.88*** (0.71) 2.90*** (0.71) 2.90*** (0.71)
Tobin's Q 0.25*** (0.03) 0.25*** (0.03) 0.25*** (0.03) 0.25*** (0.03)
CEO duality 0.08*** (0.02) 0.08*** (0.02) 0.08*** (0.02) 0.08*** (0.02)
CEO ownership -0.09** (0.03) -0.09** (0.03) -0.09** (0.03) -0.09** (0.03)
CEO tenure -0.08 (0.15) -0.08 (0.15) -0.08 (0.15) -0.08 (0.15)
Proportion of outside directors -0.01 (0.01) -0.01 (0.01) -0.01 (0.01) -0.01 (0.01)
Director ownership -0.01 (0.01) -0.01 (0.01) -0.01 (0.01) -0.01 (0.01)
Family firm status -0.02 (0.02) -0.02 (0.02) -0.02 (0.02) -0.02 (0.02)
Industry pollution position -0.01 (0.02) -0.01 (0.02) -0.01 (0.02) -0.01 (0.03)
Reporting plants 0.01 (0.03) 0.01 (0.03) 0.01 (0.04) 0.01 (0.04)
Main effects
Pollution prevention 0.03* (0.01) 0.03** (0.01) 0.03** (0.01) 0.03** (0.01)
End-of-pipe pollution control 0.03 (0.02) 0.03+ (0.02) 0.03+ (0.02) 0.03+ (0.02)
Environmental governance 0.02 (0.02) 0.01 (0.02) 0.03 (0.02)
Interactions
Pollution prevention X -0.02+ (0.01) -0.02+ (0.01)

environmental governance
End-of-pipe pollution control X 0.02 (0.01)
environmental governance
F 19.88*** 18.90*** 18.01*** 17.21***

R2 .36 .36 .37 .37
A/?2 0.00 0.01 0.00
AF 0.64 2.78+ 1.27
a n = 2,088. Table con

that are not shown be
+ p < .10
* p < .05
**p< .01
*** p< .001
Two-tailed tests.
predictor information equivalent to that in Table 4, derstanding the relationships between CEO pay
except that end-of-pipe performance replaces pol- and environmental performance is crucial to th
lution prevention performance as the dependent successful management of corporations. Conse-
variable), we find that the hypothesized main ef- quently, the conclusions derived here have not
fects and interactions were weak and not statisti- only theoretical meaning, but also clear practica
cally significant at the conventional [p < .05) level. content.
Only the interaction term in model C was slightly

significant [p < .10). This result is consistent with
Implications for Research
Hypotheses 4a and 4b, which predicted a stronger
main effect and interaction in the case of pollution
We found that environmental performance can
prevention (see Table 4) than end-of-pipe pollution
be an important nonfinancial determinant of CEO
controls (see Table 5). pay within polluting industries, even after control-
ling for accounting and market-based measures of
DISCUSSION AND CONCLUSIONS performance and other traditional determinants of
executive compensation. These results suggest that
Given the increasing public awareness of envi-
CEOs are rewarded for pursuing environmental
strategies because the outcomes associated with
ronmental issues and the growing belief that envi-
ronmental strategies can become a key sourcetheseof strategies may provide intangible benefits
competitive advantage in polluting industries,that
un- go beyond "hard-core" financial performance

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
TABLE 4
Results of Panel Data Analyses on Pollution Prevention3
Fixed Effects Random Effects (Tobit)
Variables Model A Model B Model C Model D Model E Model F
Controls
Age of assets 0.06 (0.05) 0.05 (0.05) 0.04 (0.06) -0.14* (0.06) 0.10 (0.07) 0.02 (0.06)
Regulatory intensity 0.14+ (0.08) 0.14+ (0.08) 0.04 (0.06) 0.27*** (0.04) 0.16*** (0.04) 0.17*** (0.03)
Firm size (log assets) -0.12 (0.10) -0.16+ (0.10) -0.15+ (0.09) -0.27*** (0.06) -0.33*** (0.07) -0.33*** (0.05)
Firm financial 0.01 (0.44) -0.09 (0.44) -0.42 (0.44) 0.57 (0.56) 0.73 (0.61) 0.72 (0.61)
performance (ROE)
Tobin's Q 0.05+ (0.03) 0.02 (0.03) 0.04+ (0.02) 0.16*** (0.05) 0.18** (0.06) 0.17*** (0.05)
CEO duality 0.03 (0.02) 0.02 (0.02) 0.02 (0.02) 0.05 (0.03) 0.02 (0.03) 0.03 (0.03)
CEO ownership 0.02 (0.02) 0.02 (0.02) 0.03 (0.02) -0.02 (0.02) -0.01 (0.03) -0.02 (0.02)
CEO tenure -0.15 (0.12) -0.11 (0.12) -0.35* (0.12) 0.03 (0.04) 0.01 (0.06) 0.05 (0.04)
Proportion of outside -0.06 (0.07) -0.06 (0.07) -0.03 (0.07) 0.02 (0.06) 0.03 (0.06) 0.02 (0.05)
directors
Director ownership 0.01 (0.03) 0.01 (0.03) 0.03 (0.02) 0.05 (0.03) 0.05 (0.03) 0.04 (0.03)
Family firm status 0.03* (0.02) 0.03* (0.02) 0.04* (0.02) 0.10*** (0.02) 0.11*** (0.02) 0.10*** (0.02)
Industry pollution -0.06** (0.02) -0.06** (0.02) -0.05** (0.02) -0.06* (0.02) -0.19*** (0.03) -0.20* (0.03)
position
Reporting plants -0.14*** (0.03) -0.14*** (0.03) -0.17*** (0.03) -0.32*** (0.04) -0.35*** (0.04) -0.33*** (0.03)
Main effect
Long-term pay 0.06** (0.02) 0.04+ (0.02) 0.03+ (0.02) 0.04 (0.03)
Interaction
Long-term pay X industry 0.04+ (0.02) 0.07** (0.03)
pollution position
n 1,714 1,714 1,714 2,837 2,837 2,837

F 27.28*** 26.49*** 24.34***
Wald*2 1,004.54*** 989.09*** 934.64***
R2 .13 .15 .15
Log-likelihood (Tobit) -2,060.3 -1,925.4 -1,911.3
AF 4.08** 10.05** 3.28+ 11.44**
a Table contains standardized regression

not shown because of space constraints.
+ p< 10
* p < .05
** p< .01
*** p< .001
Two-tailed tests.
(social legitimacy, corporate reputation, stake- samples or for nonpolluting industries (e.g.,
holder satisfaction, and so on). Previous findings of Coombs & Gilley, 2005). Future research should be
studies relating executive pay and social indicators aimed at identifying the specific settings in which
(Coombs & Gilley, 2005; Russo & Harrison, 2005; environmental investments have positive, neutral,
Stanwick & Stanwick, 2001) are consistent with the or negative relationship with compensation and
so-called traditionalist view, in which a trade-off other organizational features.
between environmental strategies and profitability Other design aspects of our study may explain
is posited (Jaffe, Peterson, Portney, & Stavins, 1995; the differences between our results and those that
Walley & Whitehead, 1994). In contrast, our results support the traditional view: we used an environ-
are in line with the revisionist view that good envi- mental performance measure with much greater
ronmental performance is beneficial for firms (Hart, range and variability than those used in past re-
1995; Porter & van der Linde, 1995). The setting of search (e.g., the KLD index); we accounted for
our study can help shed some light on this apparent board characteristics and ownership structure as
contradiction. We show that firms within polluting control variables; and we used a sophisticated set
industries may achieve legitimacy in their institu- of analytical techniques to tease out various effects
tional field by adopting environment-friendly pro- with a relatively large sample.
cesses, and their CEOs are rewarded accordingly. From an institutional perspective, linking com-
However, this might not be the case for broader pensation to environmental performance induces

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
FIGURE 1
Effect of the Interaction of Long-Term Pay and Industry Pollution Position on Pollution Prev
0.25|
0.2 ^y^
0.15 ^
Pollution _^
Prevention
0.05 ^S^
0 l_
2 2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 4
Long-Term Pay
- Firms in industries wit

•- ■ Firms in industries wi
a Standardized values from the Tobit mod

in the graph is the mean value of the ind
leagues (Gomez-Mejia
managers to conform to& Wiseman, 2007; Gomez-
institutio
Mejia, Wiseman, & (Ashforth
discourages avoidance Johnson, 2005; Wiseman, Cue- &
iver, 1991). From an &agency
vas-Rodriguez, persp
Gomez-Mejia, 2008) regarding the
are in line withinfluence
the of institutional context on principal-
"positivist"
(Beatty & Zajac,agent1994; Eisenhard
relationships. In short, our study suggests
1983) that when the
that institutional link
theory betwe
can reinforce rather than
performance is uncertain,
negate the basic tenets of agency theory. a pri
criterion over which
Our finding that agents
end-of-pipe pollution have
control
per the controllability principle
did not contribute significantly to CEO pay is con-
and that may improve financial
sistent with much of the environmental manage-
per the informativeness
ment literature and with theprinciple
idea that achieving
Recently, agency theory
legitimacy has
in a strong institutional com
field requires
fire in the management literature
relatively substantial strategies. The environmental
fails to address the influence of the social and in- management literature has offered a variety of an-
stitutional environment surrounding a principal- swers to the question, Why do firms go green? The
agent relation (see Aguilera & Jackson, 2003; Bruce, importance of managers in this process seems to be
Buck, & Main, 2005; Fligstein & Freeland, 1995; widely recognized, but different researchers have
Lubatkin et al., 2007). Our study is a response to offered varied explanations. Some have suggested
these critics and expands agency theory by includ- that it is the strategic position of managers that
ing insights from institutional theory, examining determines their environmental performance (e.g.,
how a key institutional factor (i.e., legitimacy) in- Aragon-Correa, 1998). Others have argued that their
tervenes in the agent-principal relationship. Our "greenness" depends on how sensitive they are to
study is in accord with Eisenhardt's (1989) recom- stakeholder pressures (e.g., Henriques & Sadorsky,
mendation to expand agency theory to richer and 1999). Still others have sought explanations in their
more complex contexts. It is also fully consistent ethical values and stances (e.g., Bansal & Roth,
with recent work by Gomez-Mejia and his col- 2000). The underlying reason suggested by our

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
TABLE 5
Results of Panel Data Analyses on End-of-Pipe Pollution Control0
Fixed Effects Random Effects (Tobit)
Variables Model A Model B Model C Model D Model E Model F
Controls
Age of assets 0.13 (0.08) 0.12 (0.09) 0.18+ (0.09) 0.21* (0.09) 0.14 (0.09) 0.18+ (0.10)
Regulatory intensity 0.13+ (0.08) 0.13+ (0.08) 0.04 (0.07) 0.25*** (0.05) 0.23*** (0.04) 0.23*** (0.04)
Firm size (log assets) -0.18+ (0.11) -0.21* (0.11) -0.19+ (0.10) -0.26*** (0.05) -0.24*** (0.05) -0.27*** (0.05)
Firm financial performance 0.30 (0.52) 0.23 (0.52) -0.53 (0.62) 0.33 (0.56) 0.43 (0.59) 0.25 (0.59)
ROE
Tobin's Q 0.02 (0.04) 0.00 (0.04) 0.01 (0.04) 0.15* (0.06) 0.14* (0.07) 0.13+ (0.07)
CEO duality -0.02 (0.03) -0.03 (0.03) 0.02 (0.03) -0.02 (0.03) -0.03 (0.03) -0.02 (0.03)
CEO ownership 0.00 (0.03) 0.00 (0.03) -0.01 (0.03) 0.04 (0.04) 0.05 (0.04) 0.05 (0.04)
CEO tenure -0.33+ (0.16) -0.30+ (0.16) -0.46** (0.16) -0.11** (0.04) -0.10** (0.04) -0.09** (0.04)
Proportion of outside 0.03 (0.06) 0.03 (0.06) -0.01 (0.05) -0.09 (0.06) -0.07 (0.06) -0.07 (0.06)
directors
Director ownership -0.01 (0.02) -0.01 (0.02) -0.01 (0.02) 0.01 (0.04) 0.00 (0.04) 0.00 (0.04)
Family firm status 0.01 (0.03) 0.01 (0.03) 0.06+ (0.03) 0.04 (0.03) 0.04 (0.03) 0.05+ (0.03)
Industry pollution position -0.06+ (0.03) -0.06+ (0.03) -0.05 (0.03) -0.04 (0.04) -0.05+ (0.03) -0.05+ (0.03)
Reporting plants -0.24*** (0.06) -0.24*** (0.06) -0.35*** (0.05) -0.27*** (0.04) -0.26*** (0.05) -0.23*** (0.05)
Main effect
Long-term pay 0.05 (0.04) 0.03 (0.04) 0.05 (0.04) 0.04 (0.04)
Interaction
Long-term pay X industry 0.06f (0.03) 0.02 (0.03)
pollution position
n 1,714 1,714 1,714 2,837 2,837 2,837
F 4.21*** 4.13*** 3.89***
Wald*2 1,071.18*** 896.31*** 836.75***
R2 .07 .07 .10
Log-likelihood (Tobit) -2,822.7 -2,666.7 -2,568.5
AF 1.13 5.65+ 4.71 1.02
a Standard errors are in pa

because of space constraint
+ p< .10
* p < .05
** p< .01
***p< .001
work is perhaps more rational in the economic all periods and remained under the control of the
sense: CEOs follow environmental strategies sim- same company for the entire period of analysis.
ply because they have economic incentives to do Patterns of coefficients were similar to those re-
so. Of course, this does not rule out the above ported, although the significance of main variables
explanations. On the contrary, it suggests that being varied slightly in some cases.11 Moreover, we com-
conscious about the environmental claims of stake- pared the selling rates of high and low polluters
holders and having strong ethical principles can be and found no statistically significant differences
of value for shareholders and managers. (with a 99 percent confidence level). This result
Industries differ dramatically in their emissions, suggests that even though selling off plants may
and firms' environmental performance depends occur, such divesting is not large enough to disturb
largely on their industrial positions. A company's our measures - and, more importantly, that highly
expansion in one industry or selling off a facility in polluting firms do not unload plants at a greater
another sector can affect its environmental marks.
This is an important research issue that has been
ignored in many relevant environmental studies. In 11 These changes in significance do not invalidate our
addition to including an index that accounts for results for two reasons. First, coefficients were signifi-
changes in a firm's industry position, we con- cant at the .10 level or better. Second, statistical signifi-
ducted several separate analyses to assess the po- cance tests are not a necessary or sufficient condition for
tential effect of selling off plants. For instance, we assessing the true importance of a variable as they suffer
calculated our pollution prevention and end-of- from many imperfections and thus are not conclusive
pipe measures using those facilities that reported in (Schmidt & Hunter, 1995; Ziliak & McCloskey, 2004).

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
information
rate than low-polluting firms assystems are needed. However,
a strategy to im- our
prove their environmental study suggests that environmental
records. Future researchgovernance
could expand this line of mechanisms
inquiry, are merely
which symbolic
may actions
haveand
significant policy implications. Although
casts doubts on the from a
efficacy of environmental
firm perspective it may be irrelevant
committees. how the
Alternative monitoring re-
mechanisms,
duction of overall firm emissions occurs (either
such as external environmental audits, may be by
cleaning up the plants the more
firmeffective.retains or by getting
rid of dirty plants over time), from
Our results a social
also suggest welfare
that what firms actu-
perspective these alternatives have clearly different
ally reward is evidence of pollution prevention
consequences. strategies rather than evidence of end-of-pipe
The corporate governance literature has largely
strategies. Top executives should take note that
neglected governance mechanisms related to envi-while pollution prevention strategies are likely to
ronmental issues. We did not find that environ-
be more demanding and risky, they should also
mental performance had a higher impact on CEO
bring greater rewards to a firm and therefore to
total pay in firms with both environmental pay its CEO.
policy and environmental committees. One poten-
Finally, we found that long-term pay is an impor-
tial explanation is that these mechanisms are sym-
bolic rather than instrumental: firms that are un- tant incentive for pollution prevention, and it is
more effective where it is needed the most - that is,
willing to make the necessary investment to reduce
or eliminate toxic emissions may instead adopt in highly polluting industries. In sectors where pol-
structures like explicit environmental pay policies luting emissions are less of a concern, long-term
and environmental committees to signal concern pay is less likely to influence pollution levels than
about the natural environment and appear to be in sectors where the environmental impact is
greater. Although we focused on the level of long-
taking the right steps to preserve it. This result is
consistent with the logic that certain governance term pay, our results may suggest that a firm with
mechanisms are a response to institutional pres- poor environmental performance should increase
sures (Luoma & Goodstein, 1999). Another way of the proportion of long-term pay in the CEO com-
looking at this is that environmental committees pensation package. However, this conclusion
are cheaper and much more expedient in dealing should be viewed with caution for two reasons.
with those pressures than actually redesigning First, our random-effect models require the as-
plants to reduce pollution. sumption of zero correlation between latent heter-
ogeneity and included observed characteristics,
Implications for Managers and Directors which is particularly restrictive. Second and per-
haps more important, this conclusion refers to the
Structuring executive compensation around en- pay mix, an issue that was not examined in our
vironmental performance can benefit firms in sev- study and that is probably deserving of its own
eral ways. First, it can stimulate managers to de- study. Much theory building and research is still
ploy efforts and resources toward environmental
needed to understand how the relative propor-
initiatives that should build a resource vital to firm
tions of various forms of pay in a compensation
survival and success: legitimacy. Second, it holds
package may influence CEO decisions that affect
them explicitly accountable for firms' environmen-
subsequent environmental performance. This is a
tal behavior. Third, it can encourage CEOs to mon-
complex issue that would entail the analysis of
itor environmental behaviors at lower organization-
factors such as risk transfer to agent, framing of
al levels. Thus it can produce desirable outcomes
for shareholders, who see firm survival secured; problem, instant endowment, stock volatility,
for managers, who increase their pay; and for perverse incentives to manipulate stock values,
society, as its noxious burden is alleviated. How- whether or not the executive may be held respon-
ever, this "triple win" appears possible only as sible for past performance (for instance, whether
long as all stakeholders recognize the negative the executive was recently appointed or has long
economic and social implications of poor envi- tenure in the firm), fungibility of various pay
ronmental performance. forms, and the like. (For related discussions of
Unfortunately, linking pay to environmental some of these issues see Bloom and Milkovich
performance may also be open to manipulation. [1998], Deyá-Tortella, Gomez-Mejia, De Castr
Although the TRI system sanctions firms for de- and Wiseman [2005], Gray and Cannella [1997],
ficiencies in reporting, misrepresentation may Miller et al. [2002], and Wiseman and Gomez-
still be possible. Therefore control policies and Mejia [1998].)

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
Limitations and Future Research pendent overseer are issues to be pursued in fu-
ture analyses.
At least four limitations in our study could be
rectified in future research. First, we concentrated
our analysis on CEOs of relatively large companies Final Remark
in the United States, and our findings may not be
generalizable to smaller companies or other geo- Good environmental behaviors are important in
achieving social legitimacy; firms should support
graphical regions. Future research can extend the
environmental strategies by using environmental
analysis to non-U.S. contexts, to other managerial
levels, or to other organizational forms such asperformance criteria to reward their CEOs. Such
public organizations and family firms. incentives can help shareholders, managers, and
Second, our measures considered only environ- the general public benefit from good environmental
performance.
mental data reported in the United States, but some
firms locate their dirty operations in "pollution
havens" abroad. Unfortunately, reliable pollution REFERENCES
data on a global scale are almost nonexistent. This
issue represents a challenge and an opportunity forAguilera, R. V., & Jackson, G. 2003. The cross-nation
future research. diversity of corporate governance: Dimensions and
Third, the environmental performance measures determinants. Academy of Management Review
38: 447-465.
we used may not necessarily be the ones boards of
directors would use or may not be readily accessi- Aiken, L. S., & West, S. G. 1991. Multiple reg
ble to them. There is limited information about the Testing and interpreting interactions. New
sources boards use to appraise CEOs' environmen- Park, CA: Sage.
tal performance; some board members may have Aldrich, H. E., & Fiol, C. M. 1994. Fools rush in? The
expertise concerning environmental issues, or a institutional context of industry creation. Academy
board may consult environmental specialists. We of Management Review, 19: 645-670.
recognize that our measures are proxies and may Antle, R., & Demski, J. S. 1988. The controllability prin-
only partially capture boards' evaluative processes. ciple in responsibility accounting. Accounting Re-
However, it would be very difficult to fully tap the view, 63: 700-718.
cognitive process of the board of each firm. Makri et Aragón-Correa, J. A. 1998. Strategic proactivity and firm
al. (2006), who used patent citations as a proxy for approach to the natural environment. Academy of
firm innovation quality, argued that "close per- Management Journal, 41: 556-567.
sonal involvement of the researchers in board de- Aragón-Correa, J. A., Matias-Reche, F., & Senise-Barrio,
liberations . . . would not be very feasible and ... in M. A. 2003. Managerial discretion and corporate
the best of cases, would yield very small samples commitment to the natural environment. Journal of
with limited statistical power and generalizability" Business Research, 57: 964-975.
(2006: 1068). Future research could address this Aragon-Correa, J. A., & Sharma, S. 2003. A contingent
issue by examining alternative measures of envi- resource-based view of proactive corporate environ-
ronmental performance that might be more likely to mental strategy. Academy of Management Review,
draw board attention. 28: 71-88.
Fourth, the topics of how environmental perfor- Ashforth, B. E., & Gibbs, B. W. 1990. The double-edg
mance impacts compensation and how incentives organizational legitimation. Organization Scien
1: 177-194.
affect subsequent environmental performance
should, ideally, be analyzed simultaneously. Given Baker, W. 1990. Market networks and corporate beh
the structure of our data (panel), fixed-effects mod- American Journal of Sociology, 96: 589-625.
els were appropriate, and we conducted our anal- Balkin, D. B., Markman, G. D., & Gomez-Mejia, L. R
ysis in separate steps. However, future research Is CEO pay in high-technology firms related to i
should look at the complex interrelations discussed vation? Academy of Management Journal, 4
1118-1129.
in this article and use more sophisticated methods
(such as structural equation models) to analyze B ansai, P. 2005. Evolving sustainably: A longi
them simultaneously. study of corporate sustainable development. S
A final avenue for future research concerns the gic Management Journal, 26: 197-218.
role of environmental governance. For instance, Bansal, P., & Clelland, I. 2004. Talking trash: Legit
the structure of an environmental committee, the impression management, and unsystematic
characteristics of its members, and the fact that it the context of the natural environment. Acade
can serve more as a consultant than as an inde- Management Journal, 47: 93-103.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
tives in
Bansal, P., & Roth, K. 2000. Why budgetary controlgo
companies systems. Accounting
green: A
Review, 2: 336-359.
model of ecological responsiveness. Academy of
Management Journal, 43: 717-736.
Deyá-Tortella, B., Gomez-Mejia, L. R., De Castro, J., &
Wiseman,L.
Barkema, H. G., & Gomez-Mejia, R. M.R.
2005.1998.
Incentive alignment or per-
Managerial
verse incentives? A behavioral
compensation and firm performance: A generalview of stock re-
options.
search framework. Academy Management Research, 3: 109-120. Jour-
of Management
nal, 41: 135-145.
DiMaggio, P. J., & Powell, W. W. 1983. The iron cage
Baysinger, B., & Hoskisson, R. E. 1990. The composition revisited: Institutional isomorphism and collective
of boards of directors and strategic control: Effects on rationality in organizational fields. American Socio-
corporate strategy. Academy of Management Re- logical Review, 48: 147-160.
view, 15: 72-87.
DiMaggio, P. J., & Powell, W. W. 1991. Introduction. In
Baysinger, B. D., Kosnik, R. D., & Turk, T. A. 1991. Effects P. J. DiMaggio & W. W. Powell (Eds.), The new
of board and ownership structure on corporate R&D institutionalism in organizational analysis: 1-38.
strategy. Academy of Management Journal, 34: Chicago: University of Chicago Press.
205-214.
Dowell, G., Hart, S. L., & Yeung, B. 2000. Do corporate
global environmental standards create or destroy
Beatty, R. P., & Zajac, E. J. 1994. Managerial incentives,
monitoring, and risk bearing: A study of executive market value? Management Science, 46: 1059-
compensation, ownership, and board structure in
1074.
initial public offerings. Administrative Science

Dowling, J., & Pfeffer, J. 1975. Organizational legitimac
Quarterly, 39: 313-335.
Social values and organizational behavior. Pacifi
Bloom, M., & Milkovich, G. T. 1998. Relationship among
Sociological Review, 18(1): 122-136.
risk, incentive pay, and organizational performance.
Eisenhardt, K. 1989. Agency theory: An assessment and
Academy of Management Journal, 41: 283-297.
a review. Academy of Management Review, 14:
Boyd, B. 1994. Board control and CEO compensation.
57-74.
Strategic Management Journal, 15: 335-344.
EPA. 1997. Terms of environment: Glossary, abb
Bruce, A., Buck, T., & Main, B. G. 2005. Top executive
tions, and acronyms. Washington, DC: Environm
remuneration: A view from Europe. Journal of Man-
tal Protection Agency.
agement Studies, 42: 1493-1506.
EPA. 2002. The Toxics Release Inventory (TR
Buysee, K., & Verbeke, A. 2003. Proactive environmental
factors to consider when using TRI data. Report
strategies: A stakeholder management perspective.
60-F-02-017: 1-29. Washington DC: Environm
Strategic Management Journal, 24: 453-470. Protection Agency.
Christmann, P. 2000. Effects of "best practices" Fama,
of envi-
E. F. 1980. Agency problems and the theory o
ronmental management on cost advantage: The role firm. Journal of Political Economy, 88: 288-298
of complementary assets. Academy of Management
Journal, 43: 663-680. Fama, E. F., & Jensen, M. C. 1983. Separation of ow
ship and control. Journal of Law and Econom
Chung, K. S., & Pruitt, W. 1994. A simple approximation
26: 301-325.
of Tobin's Q. Financial Management, 23(3): 70-74.
Finkelstein, S. 1992. Power in top management
Conyon, M. J., & Peck, S. I. 1998. Board control, remu-
Dimensions, measurement, and validation. Acad-
neration committees, and top management compen- emy of Management Journal, 35: 505-538.
sation. Academy of Management Journal, 41: 146-
157. Finkelstein, S., & Boyd, B. 1998. How much does the CEO
matter? The role of managerial discretion in the set-
Coombs, J. E., & Gilley, K. M. 2005. Stakeholder manage- ting of CEO compensation. Academy of Manage-
ment as a predictor of CEO compensation: Main ment Journal, 41: 179-199.
effects and interactions with financial performance.
Strategic Management Journal, 26: 827-840. Fligstein, N., & Freeland, R. 1995. Theoretical and com-
parative perspectives on corporate organization. In J.
Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, Hagan & K. Cook (Eds.), Annual review of sociology,
J. L. 1998. Meta-analytic reviews of board composi- vol. 21: 21-43. Palo Alto, CA: Annual Reviews.
tion leadership structure and financial performance.
Franco, M. 2007. Performance measurement issues and
Strategic Management Journal, 19: 269-290.
incentive application. In L. R. Gomez-Mejia & S.
Deephouse, D. L. 1999. To be different, or to be the same?
Werner (Eds.), Global compensation: 47-58. Lon-
It's a question (and theory) of strategic balance. Stra- don: Routledge.
tegic Management Journal, 20: 147-166.
Godfrey, P. C. 2005. The relationship between corporate
Demski, J. S. 1994. Managerial uses of accounting in- philanthropy and shareholder wealth: A risk man-
formation. Boston: Kluwer.
agement perspective. Academy of Management Re-
Demski, J. S., & Feltham, G. A. 1978. Economic incen- view, 30: 777-798.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
Gomez-Mejia, L. R., Larraza-Kintana,

views. Academy of Management Journal, 44: 9
2003. The determinants
117. of executive
in family-controlled public corporat
Henriques, I., & Sadorsky, P. 1999. The relationship be-
of Management Journal, 46: 226-23
tween environmental commitment and managerial
Gomez-Mejia, L. R., Nuñez-Nickel,
perceptions of stakeholder importance. Academy of M
2001. The role of Management
family Journal, 42: 87-99.
ties in age
Academy of Management Journal,
Hertwich, E. G., Máteles, S. F., Pease, W. S., & McKone,
Gomez-Mejia, L. R., Takacs-Haynes,
T. E. 2001. Human toxicity potentials for life-cycle K
M., Jacobson, K. J.assessment
L., and & Toxics Release Inventory J.
Movano, risk 2
screening. Environmental
tional wealth and business Toxicology and
risks in Chem-
fam
firms. Administrative
istry, 20: 928-939. Science Quar
138.
Hill, C. W., & Phan, P. H. 1991. CEO tenure as a determinant
Gomez-Mejia, L. R., & Wiseman, R. M. 1997. Refraining of CEO pay. Academy of Management Journal, 34:
executive compensation: An assessment and out- 707-717.
look. Journal of Management, 23: 291-374. Hoffman, A. J. 2000. Competitive environmental str
Gomez-Mejia, L. R., & Wiseman, R. M. 2007. Does agency egy: A guide to the changing business landscap
theory have universal relevance? A reply to Lubat- Washington, DC: Island Press.
kin, Lane, Collin, and Very. Journal of Organiza-Hoffman, A. J. 2001. Linking organizational and f
tional Behavior, 28: 81-88.
level analyses. Organization & Environment, 1
Gomez-Mejia, L. R., Wiseman, R. M., & Johnson, B. 2005. 133-252.
Agency problems in diverse contexts: A global per- Holmstrom, B. 1979. Moral hazard and observab
spective. Journal of Management Studies, 42: Bell Journal of Economics, 10: 74-91.
1507-1520.
Hsiao, C. 1985. Benefits and limitations of panel
Grant, D. S., Jones, A. W., & Bergesen, A. J. 2002. Or-
Econometric Reviews, 4: 121-174.
ganizational size and pollution: The case of the U.S.
chemical industry. American Sociological Jaffe, A. B., Peterson, S. R., Portney, P. R., & Stavins, R. N.
Review,
67: 389-407. 1995. Environmental regulation and the competi-
tiveness of U.S. manufacturing: What does the evi-
Gray, S. R., & Cannella, A. A. 1997. The role of risk
dencein tell us? Journal of Economic Literature, 33:
executive compensation. Journal of Management, 132-163.
23: 517-540.
Jensen, M. C. 1983. Organization theory and metho
Greene, W. H. 1993. Econometric analysis (2nd ogy.
ed.). Accounting Review, 56: 109-121.
New York: MacMillan.
Jensen, M. C, & Meckling, W. 1976. Theory of the
Greening, D. W., & Gray, B. 1994. Testing a model of Managerial behavior, agency costs, and owner
organizational response to social and political is- structure. Journal of Financial Economics, 3:
sues. Academy of Management Journal, 37: 467- 360.
498.
Jensen, M. C, & Murphy, K. J. 1990. Performance and top
Hart, S. L. 1995. A natural-resource-based view of the
management incentives. Journal of Political Econ-
firm. Academy of Management Review, 20: 986- omy, 98: 225-264.
1014.
Kassinis, G., & Vafeas, N. 2002. Corporate boards and
Hart, S. L., & Ahuja, G. 1996. Does it pay to be green? An outside stakeholders as determinants of environ-
empirical examination of the relationship between mental litigation. Strategic Management Journal,
emission reduction and firm performance. Business 23: 399-415.
Strategy and the Environment, 5(1): 30-37.
Khanna, M., & Damon, L. A. 1999. EPA's voluntar
Heckman, J. J. 1979. Sample selection bias as a specifi- program: Impact on toxic releases and econom
cation error. Econometrica, 47: 153-162.
formance of firms. Journal of Environmenta
Heckman, J. J., & MacCurdy, T. E. 1980. A life-cycle nomics and Management, 37: 1-25.
model of female labor supply. Review of Economic King, A. A., & Lenox, M. J. 2000. Industry self-re
Studies, 47: 47-74. without sanctions: The chemical industry's re
Henderson, A. D., & Fredrickson, J. W. 1996. Information- sible care program. Academy of Management
processing demands as a determinant of CEO com- nal, 43: 698-716.
pensation. Academy of Management Journal, 39:King, A. A., & Lenox, M. J. 2001. Lean and green? An
575-606.
empirical examination of the relationship between
lean production and environmental performance.
Henderson, A. D., & Fredrickson, J. W. 2001. Top man-
agement team coordination needs and the CEO pay Production and Operations Management, 10: 244-
256.
gap: A competitive test of economic and behavioral

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
boards ofExploring
King, A. A., & Lenox, M. J. 2002. directors in large American
the corporations.
locus of
Academy of Management
profitable pollution reduction. Management Review, 8: 426-437.
Sci-
ence, 48: 289-299.
Murphy, K. J. 1999. Executive compensation. In O.
Ashenfelter & D. Card (Eds.), Handbook of labor
King, A. A., & Lenox, M. J. 2004. Prospects for developing
absorptive capacity through internal information economics, vol. 3: 2485-2563. Amsterdam: North
provision. Strategic Management Journal, 25: 331- Holland.
345.
Oliver, C. 1991. Strategic responses to institutional
Klassen, R. D., & McLaughlin, C. P. 1996. The impact of processes. Academy of Management Review, 16:
145-179.
environmental management on firm performance.
Management Science, 42: 1199-1214. Oliver, C. 1997. Sustainable competitive adv
Klassen, R. D., & Whybark, D. C. 1999. The impact of Combining institutional and resource-based
environmental technologies on manufacturing per- Strategic Management Journal, 18: 697-713.
formance. Academy of Management Journal, 42: Peng, M. W. 2004. Outside directors and firm p
599-615.
mance during institutional transitions. Stra
Management
Lambert, R. A., Larcker, D. F., & Weigelt, K. 1993. The Journal, 25: 453-471.
structure of organizational incentives. Administra-
Porter, M. E., & van der Linde, C. 1995. Green and
tive Science Quarterly, 38: 438-461. petitive: Ending the stalemate. Harvard Bu
Review, 73(5): 120-134.
Larraza-Kintana, M., Wiseman, R. M., Gomez-Mejia,
L. R., & Welbourne, T. M. 2007. Disentangling com-
Rawwas, M. Y. A., Swaidan, Z., & Oyman, M. 2005.
pensation and employment risks using the Consumer
behav- ethics: A cross-cultural study of the ethi-
ioral agency model. Strategic Management Journal,
cal beliefs of Turkish and American consumers.
28: 1001-1019.
Journal of Business Ethics, 57: 183-195.
Lorsch, J. W., & Maclver, E. 1989. Pawns or potentates:
Robinson, P. M. 1982. On the asymptotic properties of
The reality of America's corporate boards. Boston:
estimators of models containing limited dependent
Harvard University Graduate School of Business Ad- Econometrica, 50: 27-41.
variables.
ministration.
Russo, M. V., & Fouts, P. A. 1997. A resource-based
Lubatkin, M. H., Lane, P. J., Collin, S., & Very, P. 2007. perspective on corporate environmental perfor-
An embeddedness framing of governance and oppor- mance and profitability. Academy of Management
tunism: Towards a crossnationally accommodating Journal, 40: 534-559.
theory of agency. Journal of Organizational Behav-
Russo, M. V., & Harrison, N. S. 2005. Organizational
iour, 28: 43-58.
design and environmental performance: Clues from
Luoma, P., & Goodstein, J. 1999. Stakeholders and cor- the electronics industry. Academy of Management
porate boards: Institutional influences on board Journal, 48: 582-593.
composition and structure. Academy of Manage-
Sanders, W. G., & Carpenter, M. A. 1998. Internation-
ment Journal, 42: 553-563.
alization and firm governance: The roles of CEO
Makri, M., Lane, P. J., & Gomez-Mejia, L. R. 2006. CEO compensation, top team composition, and board
incentives, innovation, and performance in technol- structure. Academy of Management Journal, 41:
ogy-intensive firms: A reconciliation of outcome and 158-178.
behavior-based incentive schemes. Strategic Man-

Sanders, W. G., & Hambrick, D. C. 2007. Swinging
agement Journal, 27: 1057-1080.
fences: The effects of CEO stock options on co
McConaughy, D. L. 2000. Family CEOs vs. non family risk taking and performance. Academy of Ma
CEOs in the family-controlled firm: An examination ment Journal, 50: 1055-1078.
of the level and sensitivity of pay to performance.
Sarkis, J., & Cordeiro, J. J. 2001. An empirical e
Family Business Review, 13: 121-131.
of environmental efficiencies and firm perfor
McEachern, W. A. 1975. Management control and per- Pollution prevention versus end-of-pipe p
formance. Lexington, MA: Heath. European Journal of Operational Research
102-113.
Meyer, J., & Rowan, B. 1977. Institutional organizations:
Formal structure as myth and ceremony. American Schmidt, F., & Hunter, J. E. 1995. The impact of
Journal of Sociology, 83: 340-363. analysis methods on cumulative research kn
Miller, J. S., Wiseman, R. M., & Gomez-Mejia, L. R. 2002. edge. Statistical significance testing, confidence
The fit between CEO compensation design and firm tervals and meta-analysis. Evaluation & the H
risk. Academy of Management Journal, 45: 745- Professions, 18: 408-427.
756. Scott, W. R. 1995. Institutions and organizations. Th
Mizruchi, M. S. 1983. Who controls whom? An exami- sand Oaks, CA: Sage.
nation of the relation between management and Scott, W. R. 2005. Institutional theory: Contributin

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
theoretical research
Turban, program. In
D. B., & Greening, D. W. 1997. K.
Corporate G.
social
Hitt (Eds.), Great performance
minds in managem
and organizational attractiveness to
prospective employees. Academy of460-48
cess of theory development: Management
Journal, 40: 658-672.
ford University Press.
Shameek, K., & Walley, N., & M.
Cohen, Whitehead,
A. B. 1994. It's not easy being
2000. Why
(and reduce) green. Harvard
toxic Business Review, 72(3): 46-52.Wo
emissions?
Vanderbilt University,
Westphal, J. D., &Nashville.
Zajac, E. J. 1994. Substance and
symbolism in CEOs' long-term
Sharma, S. 2000. Managerial incentive plans.
interpretat
Administrative
zational context as predictors of Science Quarterly, 39: 367-390.
corp
environmental strategy. Academy
White, H. 1980. A heteroskedasticity-consistent covari- o
Journal 43: 581-597. ance matrix estimator and a direct test for het-
Sharma, S., & Henriques, I. 2005. Stakeholder influences eroskedasticity. Econometrica, 48: 817-830.
on sustainability practices in the Canadian forest Wiseman, R. M., Cuevas-Rodríguez, G., & Gomez-Mejia,
products industry. Strategic Management Journal, L. R. 2008. A social agency model. Michigan State
26: 159-180.
University, Department of Management working pa-
pers series: 1-47.
Sharma, S., & Vredenburg, H. 1998. Proactive corporate
environmental strategy and the development of com-
Wiseman, R. M., & Gomez-Mejia, L. R. 1998. A behavioral
petitively valuable organizational capabilities. Stra-
agency model of managerial risk taking. Academy of
tegic Management Journal, 19: 729-753. Management Review, 22: 133-153.
Wooldridge,
Sherer, P. D., & Lee, K. 2002. Institutional change in large J. M. 2002. Econometric analysis of cross
law firms: A resource dependency and institutionalsection and panel data. Cambridge, MA: MIT Press.
perspective. Academy of Management Journal, 43:
Ziliak, S. T., & McCloskey, D. N. 2004. Significance
102-119.
redux. Journal of Socio-Economics, 33: 665-675.
Shrivastava, P. 1995a. The role of corporations in achiev-
ing ecological sustainability. Academy of Manage-
APPENDIX A
ment Review, 20: 936-960.
Shrivastava, P. 1995b. Ecocentric management for a risk Description of Sample

society. Academy of Management Review, 20:
118-137.
TABLE Al
Singh, J. V., Tucker, D. J., & House, R. J. 1984. Organiza-
tional legitimacy and the liability of newness. Ad- Sample Breakdown
ministrative Science Quarterly, 31: 171-193.
Number of Years of Firm-Level
Smarzynska, B. K., & Wei, S.-J. 2001. PollutionFirms
haven Data Observations
and foreign direct investment: Dirty secret or pop-
ular myth? Working paper series, 1-31, Washington,
90 2 180
DC: World Bank. 89 3 267

62 4 248
Stanwick, P. A., & Stanwick, S. D. 2001. CEO compensa- 62 5 310
tion: Does it pay to be green? Business Strategy and 79 6 474
the Environment, 10(3): 176-182. 87 7 609
Staw, B. M., & Epstein, L. D. 2000. What bandwagons 469 2,088

bring: Effects of popular management techniques on
corporate performance, reputation, and CEO pay.
Administrative Science Quarterly, 45: 523-556.
Suchman, M. C. 1995. Managing legitimacy: Strategic APPENDIX B
and institutional approaches. Academy of Manage-
ment Review, 20: 571-610. Calculation Procedures
Toffel, M. W., & Marshall, J. D. 2004. Improving environ- 1. Calculation of Weighted Waste Score
mental performance assessment: Comparative anal- Formally, we obtained a weighted waste score for each
ysis of weighting methods used to evaluate chemical facility using the following formula:
release inventories. Journal of Industrial Ecology,
8(1-2): 143-172. wwjt= JjJjEkitXfki, (1)
k i
Tosi, H. L., Werner, S., Katz, J., & Gomez-Mejia, L. R.

2000. How much does performance matter? A meta- where EkIt is the emissions of chemical 7 t
analysis of CEO pay studies. Journal of Manage- year í by facility;; and is the weighting fac
ment, 26: 301-339. ing to chemical 1 emitted to medium k.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00
2. Calculation of Pollution Prevention Measure assets of the firm) and then summed them at the firm
level. The final measure we obtained for each firm can be
For firm i, we could formally state the pollution pre-
vention measure as follows,0 formally represented with the following equation:
PPit+i = predicted_wasteit+1 - waste it+1 (2)

where 5>,x£, (5)
predicted_wasteit+1 = ^wwjt X PRjt+1, (3)
where Rj is the pollution rank position of segment ;, A
/
the total identifiable assets of segment /, AT is the to
assets of the company, and n is the total number
wasteit+1 = 2^/t+i. (4)
segments of the firm. As a result, this measure accou
for the firm's industry composition, its dirtiness, and
and j are the facilities that belong to firm i. relative importance of each segment in which the firm
If actual waste level is lower than the predicted level,
operates.
Equation 2 would yield positive values, evidencing re-
duction of waste generation. Thus, bigger values are as-
sociated with better pollution prevention performance.
3. Industry Pollution Position Index Pas

The index industry pollution position uses data from fes
the Compustat Business Segment database. For each He received his Ph.D. in business administration and
firm, we gathered data on all business segments that a quantitative methods from Universidad Carlos III. His
company operated and identified each segment's SIC current research interests focus on various aspects of the
code. We then ranked each segment according to its interface between corporate governance and corporate
"dirtiness," established by ranking industries (catego-
social responsibility, with particular emphasis on the
rized by two-digit SIC code) according to their totalimpact of incentive schemes on the environmental per-
amount of toxic emissions, from the most to the least formance of firms. His research also examines sustain-
polluting sector. We later weighted the rank of each able innovation, family firms, and related corporate gov-
business segment by its economic importance to the firm ernance issues.
(identifiable total assets of each segment divided by total
Luis R. Gomez-Mejia (luis.gomez-mejia@asu.edu) is a
Council of 100 Distinguished Scholar at Arizona State
a We are thankful to an anonymous reviewer for sug- University (ASU) and holds the Horace Steel Chair there.
gesting this method. To gain confidence in this measure, He is a Regent's Professor at ASU and has recently re-
we compared our pollution prevention measure with the ceived the title of doctor honoris causa from Universidad
log of on-site releases, and they were correlated at -.52. Carlos III. He received his Ph.D. from the University of
We also calculated the inverse of weighted on-site emis- Minnesota. His current research interests are family busi-
sions divided by firm sales, and using this measure in our ness and macro compensation issues, including risk tak-
estimations did not change our findings substantially. ing and executive compensation design.
Results of estimations using this latter variable are avail-
able from the authors upon request.

139.184.223.143 on Mon, 20 May 2024 12:47:03 +00:00

Berrone EnvironmentalPerformanceExecutive 2009

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Berrone EnvironmentalPerformanceExecutive 2009

Uploaded by

Copyright:

Available Formats

Environmental Performance and Executive Compensation: An Integrated Agency-

Stable URL: https://www.jstor.org/stable/40390278

This content downloaded from

ENVIRONMENTAL PERFORMANCE AND EXECUTIVE

Relying on institutional theory, agency rationale, and environmental management

The authors would like to thank the former editor-in-

This content downloaded from

formance, particularly (Bansal, 2005; Bansal

This content downloaded from

which managers The

This content downloaded from

This content downloaded from

In sum, there is The Moderating

This content downloaded from

consider this assessment Lenox

This content downloaded from

METHODS pendix A provides a detailed description of the

This content downloaded from

6 Production ratio values often vary around 1. For in-

This content downloaded from

This content downloaded from

Third, we included CEO to pollute more and

This content downloaded from

This content downloaded from

Descriptive Statistics and Correlations0

1. Total payb 13.67 2.45

interaction term for environmental governance

This content downloaded from

F 23.15*** 20.15*** 22.80*** 19.88***

a n = 2,088. Table contain

This content downloaded from

Variables Model A Model B Model C Model D

Pollution prevention X -0.02+ (0.01) -0.02+ (0.01)

F 19.88*** 18.90*** 18.01*** 17.21***

a n = 2,088. Table con

Only the interaction term in model C was slightly

This content downloaded from

Variables Model A Model B Model C Model D Model E Model F

n 1,714 1,714 1,714 2,837 2,837 2,837

a Table contains standardized regression

This content downloaded from

2 2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 4

- Firms in industries wit

a Standardized values from the Tobit mod

This content downloaded from

Variables Model A Model B Model C Model D Model E Model F

a Standard errors are in pa

This content downloaded from

This content downloaded from

This content downloaded from

initial public offerings. Administrative Science

This content downloaded from

Gomez-Mejia, L. R., Larraza-Kintana,

This content downloaded from

behavior-based incentive schemes. Strategic Man-

This content downloaded from

Shrivastava, P. 1995b. Ecocentric management for a risk Description of Sample

DC: World Bank. 89 3 267

Staw, B. M., & Epstein, L. D. 2000. What bandwagons 469 2,088

Tosi, H. L., Werner, S., Katz, J., & Gomez-Mejia, L. R.

This content downloaded from

PPit+i = predicted_wasteit+1 - waste it+1 (2)

3. Industry Pollution Position Index Pas

F 23.15* 20.15* 22.80* 19.88*

F 19.88* 18.90* 18.01* 17.21*