Table 5 provides some descriptive statistics for the variables of this study. Panel A shows that, first, the mean of most variables is not representative of the sample, as data points are distant from the mean. Second, the skewness statistic shows low scores for all variables except price-to-book value and compensation committee independence. Finally, the Kurtosis statistic shows a pointy and heavy-tailed distribution for all variables. Panel B, on the other hand, represents unequal group sizes for all seven grouping variables. The K-S test confirms that the scores for all variables are significantly different from a normal distribution. Thus, care must be exercised when parametric statistics are used. However, there is a debate in the literature about using parametric or non-parametric tests for large samples (Field, 2010). For this reason, the first hypothesis will be tested by a panel data logistic regression test, which does not require normally distributed variables. The second hypothesis will be tested using both panel data linear regression (parametric test) and the Mann-Whitney test (non-parametric test).
The composite variables of noise in the financial measures and competition type are created using principal component analysis. Table 6, Panel A, shows the Component Matrix, eigenvalues, and the proportion of variance of noise in the financial measure. Panel B presents the Component Matrix, eigenvalue, and the proportion of variance of the competition type measure.
4.1. Sustainability Incentives Usage as a Function of Firms’ Characteristics (Hypothesis 1)
Table 7 presents the correlation matrix of independent variables. A two-strong linear relationship (0.8) is found between PDC and PLC, which indicates a multicollinearity problem.
Table 8 reports the result of the panel data logistic regression. The Hausman test is used to decide whether to use fixed or random effect models. The results provide evidence in favor of random effect models. The relevant value of the X² test is X²(7) = 1.74, with a p-value = 0.973.
The results indicate that the model (1) is a significant fit of the data. Thus, hypothesis 1 is supported for firm size, compensation committee independence, the CSR Sustainability Committee, CSR Sustainability Index, and Resource Efficiency Policy Elements, which significantly affect sustainability usage. However, hypothesis 1 is rejected for the other firm characteristics. There are two possible explanations for the contradiction of this finding with previous studies: the differences in the measures used as proxies of firm characteristics in this study and/or the difference among countries, as this study used UK data.
The results provide two different pieces of evidence. First, there is a significant positive impact of firm size, compensation committee independence, CSR Sustainability Committee, and CSR Sustainability Index on sustainability usage. The impact of firm size is consistent with Bushman et al.’s (1996) study, as large firms should have more capacity to support sustainability issues. The committee independence factor is one of the internal control mechanisms, and therefore, it was expected to have a positive effect because an independent committee should be able to choose suitable measures with little pressure from the management. Our results support this expectation. The results further confirm that firms adopting sustainability practices – such as the CSR Sustainability Committee, CSR Sustainability Index, and sustainability resource efficiency policy – are more likely to use sustainability incentives in their compensation contracts. One possible explanation is that firms adopting sustainability practices have a better sustainability information system, which facilitates the use of sustainability measures in compensation contracts. Another explanation is that the use of sustainability incentives would motivate executives to implement effective sustainability practices.
The positive impact of these variables can only be explained on the basis that firms do not face pressure from their shareholders to take the maximization of shareholder value as the main objective. Furthermore, these firms are better able to concentrate on environmental and social perspectives of sustainability. Second, there is a significant negative impact of sustainability resource efficiency policy on the sustainability incentive usage in executives’ remuneration. This result was not expected, given that firms focusing on improving their sustainability resource efficiency would reflect this in their compensation contracts by including a sustainability incentive measure. This can be explained by the fact that firms with a policy to improve their use of sustainability resource efficiency are still in the early stages of adopting this policy and have not yet included sustainability incentives in their compensation contracts. Another explanation for this significant negative impact is that the focus on sustainability resources efficiency might incur higher costs, or there may not be enough pressure from stakeholders to force these firms to adopt and adapt more sustainability practices.
4.2 Shareholders’ Returns as a Function of the Adoption of Sustainability Incentives (Hypothesis 2)
The panel data linear regression results for shareholders’ returns as a function of the adoption of sustainability incentives are presented in Table 9. The Breusch-Pagan/Cook-Weisberg test for heteroskedasticity indicates the presence of significant heteroskedasticity for both models. Therefore, the residual variance is non-constant, which implies that standard errors could be biased. To control for heteroskedasticity, regression with the clustered robust standard errors method is followed. This method effectively deals with heteroskedasticity by making adjustments in the estimates. Thus, clustered robust estimation of standard errors is tested, and the standard errors were adjusted for 181 clusters in the sample.
Table 9 presents the empirical results of the estimation of model (2) using RSHF as a shareholders’ return variable. Return on shareholders’ funds is statistically significant with sustainability adoption (at the 5% level). The positive coefficient of sustainability indicates that firms with sustainability adoption are more likely to achieve a higher total shareholder return. One possible explanation for this is that the adoption of sustainability incentives does not increase agency costs. This result supports the conflict-resolution hypothesis.
Table 9 also reports that the return on shareholder funds is statistically significant with the growth rate. Furthermore, the negative coefficient of growth rate indicates that firms with a high growth rate are less able to achieve a higher shareholder return.
The estimation of model (3) using TSR as a shareholders’ returns variable is reported in Table 9. The coefficient of sustainability incentives is positive but not significant. Furthermore, total shareholders’ returns is statistically significant with firm size. However, the negative coefficient of firm size indicates that big firms are less able to achieve higher shareholders’ returns.
The result of the Wilcoxon rank-sum (Mann-Whitney) test for differences in shareholders’ returns between sustainability firms and non-sustainability firms is reported in Table 10. The return on shareholder funds in sustainability firms does not significantly differ from non-sustainability firms. However, total shareholders’ returns in sustainability firms significantly differ from non-sustainability firms. Therefore, the second hypothesis is not supported for the return on shareholder funds but is supported for total shareholders’ returns. This can be explained by the usage of sustainability targets, which focus on the long-term, not necessarily leading to a negative effect on the short-term return.
The results indicate that there is a significant relationship between the use of sustainability incentives and return on shareholder funds, but the relationship is not significant between the use of sustainability incentives and total shareholders’ returns. Despite the non-significance of this relationship, the positive coefficient means that the use of sustainability incentives does not only meet stakeholders’ expectations but also does not negatively influence shareholders’ needs. This result is consistent with previous studies, which tested the use of non-financial measures among long-term measures in compensation plans, such as Banker et al. (2000) and Said et al. (2003). It is also consistent with Cai’s (2011) results, which supported the conflict-resolution hypothesis based on shareholder theory. Therefore, the result provides evidence that the use of sustainability incentives in compensation contracts can be a solution to the agency problem.
Overall, our evidence is consistent with the prediction that the use of sustainability incentives motivates managers to engage in more sustainability activities without overinvesting in any single dimension of sustainability practices, to gain extrinsic rewards and realize stakeholder benefits.
