ESG Pay Features and Firm Value: International Evidence from Integrated Reporting Adopters

This paper investigates how specific features of ESG-linked compensation – its presence, time horizon, weighting, completeness, and metric ‘hardness’ – relate to firm value and whether their value relevance varies with firms’ reporting environment. Using hand-collected, detailed ESG compensation data for a global sample of Integrated Reporting (IR) reporters and matched non-reporters, we find that merely incorporating short-term ESG targets does not correlate with higher future operating cash flows or Tobin’s Q. In contrast, the positive associations of long-term, heavily weighted, comprehensive, and quantitatively hard ESG metrics with firm value concentrate among IR reporters. These relations are stronger in firms with substantial institutional ownership and deeper ESG integration in their management discussions. Overall, our findings suggest that ESG-linked pay matters through its design, and that the value relevance of these design features is stronger in firms with an IR-related reporting environment characterized by greater external oversight and deeper internal integration of ESG engagement.