The Impact of Executive Pay Gap on Environmental and Social Performance in the Energy Sector: Worldwide Evidence

This study examines the impact of the executive pay gap on corporate social performance (CSP), which is the average of social and environmental performance scores for firms in the energy sector worldwide. Following agency theory, we find that firms that pay their executives more than the industry average (pay gap) have lower CSP. We also examine the role of corporate governance at the firm level and market-supporting institutions at the country level to explain the relationship between the pay gap and CSP. The negative effect of the pay gap on CSP is less pronounced for firms located in countries with weaker market-supporting institutions. This evidence is consistent with the idea that firms use CSP to reach a broad investor base in weak market conditions. However, our results show that firm-level corporate governance is not as effective as country-level market institutions. This evidence supports the notion that development of country-level institutions drives CSP in the energy sector.