Environmental risk exposure and executive pay-for-performance sensitivity

We study how firms adjust the executive's pay-for-performance sensitivity in response to changes in environmental risks. Using the 2017 Environmental Regulation in China as a natural experiment, we show that firms lower their pay-for-performance sensitivity without changing the overall level of compensation when the central government imposes a higher standard of environmental policy. This effect is more pronounced in non-SOEs and firms with higher accounting performance pressure, worse environmental performance, and a stricter legal environment. Our findings highlight how firms adjust compensation contracts based on changes in business risks. It also shows how changes in government regulation (e.g., environmental policy) might affect corporate behavior, such as compensation policy.