Sustainability and senior executive compensation : A study of the relationship between sustainability and senior executive compensation in the Nordics

The focus on sustainability has become more noticeable during recent years. This is especially evident in the Nordics, were Sweden, Norway, Denmark and Finland tops the sustainability rankings. Moreover, several studies have been conducted surrounding the topic of the sustainability measuring ESG-scores and their relation to financial performance. Simultaneously, researchers have come up with controversial findings regarding the relationship between financial performance and executive compensation. This study aims to find out the relationship between sustainability and senior executive compensation in the Nordics, as well as how they are both connected to financial performance. In order to fulfill this, eight multiple regression models were created on a sample of 101 Nordic companies. The chosen dependent and independent variables comprised various ESG-scores, as well as a ratio of senior executive compensation divided by total revenue. This resulted in 895 different observations during the years 2008 to 2017. This is a quantitative study following the positivist paradigm. Moreover, a deductive approach is taken in regard to how theory is used. Theories used to make conclusions include the stakeholder theory, the shareholder theory, the legitimacy theory, the agency theory and the stewardship theory. The regression models of choice were the OLS model and the OLS robust model, depending whether the models fulfilled the assumption regarding heteroscedasticity. The findings showed no significant relationship between the ESG combined score and the senior executive compensation ratio in the Nordics. However, a significant negative relationship between the compensation and the social and environmental scores could be found. Moreover, the governance-score was the only ESG-score to indicate a positive relationship with senior executive compensation. Conclusions could be made that there is a negative relationship between senior executive compensation and sustainability factors such as emission reduction and employment quality. This finding is in favor for the shareholders, but not the stakeholders. Additionally, there is a positive relationship between senior executive compensation and good governance. This includes factors such as a high score regarding board structure, shareholder rights and CSR strategy. It could also be concluded that good governance has an indirect positive impact on financial performance. Furthermore, the findings question previous arguments that executive compensation is an agency cost, rather than a solution of the agency problem