Executive compensation and non-financial risk: An empirical examination

Executives face potentially severe (non-financial) personal risks if firm environmental performance is below industry best practice. We examine the relation between CEO compensation and the non-financial risk associated with environmental exposure, and how use of environmental performance as an explicit determinant of compensation affects this relation. We find evidence that CEOs are compensated for exposure to environmental risk, even after controlling for financial risk. We also find that this premium is reduced when the CEO has greater opportunities to improve the firm’s environmental performance.