Abstract

This research aims to investigate the moderating effect of environmental, social and governance (ESG) disclosure on the sensitivity of executive pay to market performance (pay-performance sensitivity - PPS) in Brazilian companies listed in the B3 IBrX-100 index. It also investigates the factors that influence PPS in order to seek explanations for the effect of ESG disclosure on PPS and to identify which theoretical perspective (agency theory, stakeholder theory, or the good governance view) can support the results found for Brazilian companies. It highlights the importance of monitoring ESG disclosure in the Brazilian capital market, as well as helping to understand whether or not ESG disclosure contributes to the extraction of shareholder income by executives, and provides insights for new research to be conducted considering ESG disclosure. The results have implications for understanding the principal-agent relationship and for understanding ESG disclosure in conflict mitigation when used by companies to improve PPS. A total of 81 companies were analyzed between 2016 and 2021. The method used for the main analyses was the ordinary least squares regression model (with robust standard errors), while quantile regression was used for the robustness analysis. The results indicate that ESG disclosure maximizes the sensitivity of executive pay to market performance. This study contributes to the literature by providing new evidence on PPS and identifying which theoretical perspective supports the results found in the Brazilian context. It also contributes to organizations by showing that ESG investments can mitigate agency problems and by revealing the importance of ESG implementation for firms, given the evidence of a positive impact on PPS. It contributes to society by encouraging organizations to invest in ESG issues.

Keywords:
ESG; executive pay; pay-performance sensitivity; performance

Resumo

Esta pesquisa tem o objetivo de investigar o efeito moderador da divulgação ESG na sensibilidade da remuneração dos executivos ao desempenho de mercado (pay-performance sensitivity) em empresas brasileiras listadas no índice IBrX-100 da B3. Também investiga os fatores que impactam a PPS, de modo a buscar explicações sobre o efeito da divulgação ESG na pay-performance sensitivity e identificar qual perspectiva teórica (Teoria da Agência, Teoria dos Stakeholders e visão da boa governança) possibilita sustentação dos resultados encontrados para empresas brasileiras. Evidencia a importância de se observar as divulgações ESG no mercado de capitais brasileiro, bem como auxilia a compreender se a divulgação ambiental, social e de governança está contribuindo ou não para extração de renda do acionista pelo executivo, e produz insights para que novas pesquisas sejam realizadas considerando a divulgação ESG. Os resultados apresentam implicações para o entendimento da relação agente-principal e para a compreensão da divulgação ESG na mitigação de conflitos, quando utilizada nas empresas para potencializar a PPS. Foram analisadas 81 empresas entre 2016 e 2021. O método utilizado para as análises principais foi o modelo de regressão por Mínimos Quadrados Ordinários (com erros padrões robustos), enquanto para a análise de robustez foi utilizada a regressão quantílica. Os resultados indicam que a divulgação ESG maximiza a sensibilidade da remuneração dos executivos ao desempenho de mercado. Este trabalho contribui com a literatura ao trazer novas evidências sobre a PPS e ao identificar qual perspectiva teórica dá sustentação aos resultados encontrados no contexto brasileiro. Contribui também para as organizações ao evidenciar que investimentos ESG podem mitigar problemas de agência e ao revelar a importância da implementação de questões ESG para as empresas, diante das evidências de influência positiva na PPS. Contribui com a sociedade ao encorajar as organizações a investirem em aspectos ambientais, sociais e de governança.

Palavras-chave:
ESG; remuneração dos executivos; pay-performance sensitivity; desempenho

1. INTRODUCTION

Executive pay is the focus of studies aimed at verifying the determinants of remuneration, given its importance in aligning the interests of principals and agents and, consequently, in mitigating agency problems (Blanes et al., 2020Blanes, F., Fuentes, C., & Porcuna, R. (2020). Executive remuneration determinants: New evidence from meta-analysis. Economic research-Ekonomska istraživanja, 33(1), 1-23. https://doi.org/10.1080/1331677X.2019.1678503
https://doi.org/10.1080/1331677X.2019.16... ). The conflict of interest between shareholders and the Chief Executive Officer (CEO) of a publicly-traded company is a classic example of a principal-agent problem, and in this environment, both the efforts of executives and the opportunities for good investments by shareholders are not perfectly observable (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ).

Thus, "agency theory predicts that remuneration policy will be designed to give the manager incentives to select and implement actions that increase shareholder wealth" (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... , p. 226). This theory also argues that executive pay should be linked to corporate performance in order to align the interests of principals and agents. Thus, agents of firms with superior performance would be rewarded with higher salaries (Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ).

In addition, the ideal contracting view predicts that managers need incentives to maximize shareholder value (Bebchuk & Fried, 2003Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362
https://doi.org/10.1257/0895330037692043... ). In the ideal contracting view, an optimal executive pay contract links CEO pay to performance because it aligns the interests of shareholders and managers, thereby reducing agency problems (Blanes et al., 2020Blanes, F., Fuentes, C., & Porcuna, R. (2020). Executive remuneration determinants: New evidence from meta-analysis. Economic research-Ekonomska istraživanja, 33(1), 1-23. https://doi.org/10.1080/1331677X.2019.1678503
https://doi.org/10.1080/1331677X.2019.16... ). This linkage would maximize the sensitivity of executive pay to market performance (Blanes et al., 2020Blanes, F., Fuentes, C., & Porcuna, R. (2020). Executive remuneration determinants: New evidence from meta-analysis. Economic research-Ekonomska istraživanja, 33(1), 1-23. https://doi.org/10.1080/1331677X.2019.1678503
https://doi.org/10.1080/1331677X.2019.16... ; Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Murthy, 1999Murphy, K. J. (1999). Executive compensation. In O. Ashenfelter, D. Card (Eds.), Handbook of Labor Economics(Vol. 3, pp. 2485-2563). https://doi.org/10.1016/S1573-4463(99)30024-9
https://doi.org/10.1016/S1573-4463(99)30... ).

With regard to the sensitivity of executive pay to market performance, its presence is identified when executive pay can be explained by performance. This is known in the literature as pay-performance sensitivity (PPS) (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ). In the finance literature, PPS is conceptualized as the relationship between increases in executive pay and increases in the firm's market value (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ). In this context, executive pay that is sensitive to market performance occurs when an increase in market value is responsible for an increase in executive pay (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ). The PPS addressed in this study is based on the model of Jensen and Murphy (1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... , p. 227), who define it "as the monetary change in CEO wealth associated with a monetary change in shareholder wealth." Therefore, a higher PPS is "indicative of a greater alignment of interests between the CEO and his or her shareholders" (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... , p. 227).

Executive pay can be sensitive to environmental, social and governance (ESG) disclosure, as contracts may require compliance (Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Instituto Brasileiro de Governança Corporativa [IBGC], 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ) in response to economic incentives that pressure managers and shareholders to implement an ESG agenda (Monteiro et al., 2021Monteiro, G. F. A., Miranda, B. V., Rodrigues, V. P., & Saes, M. S. M. (2021). ESG: disentangling the governance pillar. RAUSP Management Journal, 56(4), 482-487. https://doi.org/10.1108/RAUSP-06-2021-0121
https://doi.org/10.1108/RAUSP-06-2021-01... ). However, information asymmetry and bargaining power can lead to an unequal distribution of values, meaning that it will not always be a "win-win" relationship (Monteiro et al., 2021Monteiro, G. F. A., Miranda, B. V., Rodrigues, V. P., & Saes, M. S. M. (2021). ESG: disentangling the governance pillar. RAUSP Management Journal, 56(4), 482-487. https://doi.org/10.1108/RAUSP-06-2021-0121
https://doi.org/10.1108/RAUSP-06-2021-01... ).

Corporate actions carried out in this area are referred to as ESG or Corporate Social Responsibility (CSR) (Gillan et al., 2021Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 1-16. https://doi.org/10.1016/j.jcorpfin.2021.101889
https://doi.org/10.1016/j.jcorpfin.2021.... ). In this study, the focus will be on ESG. However, it should be noted that the literature supporting the proposed relationships sometimes refers to CSR (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ; Jian & Lee, 2015Jian, M., & Lee, K. W. (2015). CEO compensation and corporate social responsibility. Journal of Multinational Financial Management, 29, 46-65. https://doi.org/10.1016/j.mulfin.2014.11.004
https://doi.org/10.1016/j.mulfin.2014.11... ), and since it has elements that are present in the ESG concept, in this research both will be interpreted in a similar way (Clement et al., 2023Clement, A., Robinot, E., & Trespeuch, L. (2023). The use of ESG scores in academic literature: A systematic literature review. Journal of Enterprising Communities: People and Places in the Global Economy, Ahead-of-Print. https://doi.org/10.1108/JEC-10-2022-0147
https://doi.org/10.1108/JEC-10-2022-0147... ), as there are few studies that have analyzed the effect of ESG disclosure on executive pay (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Gillan et al., 2010Gillan, S., Hartzell, J. C., Koch, A., & Starks, L. T. (2010). Firms’ environmental, social and governance choices, performance and managerial motivation. Working Paper, 1-45. Retrieved from: https://sites.pitt.edu/~awkoch/ESG%20Nov%202010.pdf
https://sites.pitt.edu/~awkoch/ESG%20Nov... ; Jian & Lee, 2015Jian, M., & Lee, K. W. (2015). CEO compensation and corporate social responsibility. Journal of Multinational Financial Management, 29, 46-65. https://doi.org/10.1016/j.mulfin.2014.11.004
https://doi.org/10.1016/j.mulfin.2014.11... ; Karim et al., 2018Karim, K., Lee, E., & Suh, S. (2018). Corporate social responsibility and CEO compensation structure. Advances in Accounting, 40, 27-41. https://doi.org/10.1016/j.adiac.2017.11.002
https://doi.org/10.1016/j.adiac.2017.11.... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ) and the moderating effect of ESG on PPS (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ; Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ).

One difference between the terms ESG and CSR is that "ESG explicitly includes governance and CSR indirectly includes governance issues related to environmental and social considerations. Therefore, ESG tends to be a broader terminology than CSR" (Gillan et al., 2021Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 1-16. https://doi.org/10.1016/j.jcorpfin.2021.101889
https://doi.org/10.1016/j.jcorpfin.2021.... , p. 2). ESG refers to a set of environmental, social and governance criteria that have emerged with the incorporation of social concerns into corporate investments and that guide the way businesses are evaluated by socially responsible investors (Monteiro et al., 2021Monteiro, G. F. A., Miranda, B. V., Rodrigues, V. P., & Saes, M. S. M. (2021). ESG: disentangling the governance pillar. RAUSP Management Journal, 56(4), 482-487. https://doi.org/10.1108/RAUSP-06-2021-0121
https://doi.org/10.1108/RAUSP-06-2021-01... ; Pedersen et al., 2021Pedersen, L. H., Fitzgibbons, S., & Pomorski, L. (2021). Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 142(2), 572-597. https://doi.org/10.1016/j.jfineco.2020.11.001
https://doi.org/10.1016/j.jfineco.2020.1... ).

Despite the attention given to ESG disclosure, the literature discusses whether this concept contributes to the financial performance and market value of companies, as the conclusions are different (Gillan et al., 2021Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 1-16. https://doi.org/10.1016/j.jcorpfin.2021.101889
https://doi.org/10.1016/j.jcorpfin.2021.... ). The findings on the effect of ESG disclosure on corporate performance are a mixture of positive (Alareeni & Hamdan, 2020Alareeni, B. A., & Hamdan, A. (2020). ESG impact on performance of US S&P 500-listed firms. Corporate Governance: The International Journal of Business in Society, 20(7), 1409-1428. https://doi.org/10.1108/CG-06-2020-0258
https://doi.org/10.1108/CG-06-2020-0258... ), negative (Atan et al., 2018Atan, R., Alam, M. M., Said, J., & Zamri, M. (2018). The impacts of environmental, social and governance factors on firm performance: Panel study of Malaysian companies. Management of Environmental Quality: An International Journal, 29(2), 182-194. https://doi.org/10.1108/MEQ-03-2017-0033
https://doi.org/10.1108/MEQ-03-2017-0033... ; Duque-Grisales & Aguilera-Caracuel, 2021Duque-Grisales, E., & Aguilera-Caracuel, J. (2021). Environmental, social and governance (ESG) scores and financial performance of Multilatinas: moderating effects of geographic international diversification and financial slack. Journal of Business Ethics, 168, 315-334. https://doi.org/10.1007/s10551-019-04177-w
https://doi.org/10.1007/s10551-019-04177... ), and not significant (Nekhili et al., 2017Nekhili, M., Nagati, H., Chtioui, T., & Rebolledo, C. (2017). Corporate social responsibility disclosure and market value: Family versus nonfamily firms. Journal of Business Research, 77, 41-52. https://doi.org/10.1016/j.jbusres.2017.04.001
https://doi.org/10.1016/j.jbusres.2017.0... ).

The positive results are explained by the fact that ESG activities tend to improve operational efficiency by reducing waste and resources, which consequently creates shareholder value and provides higher returns and lower volatility and risk in the capital market (Gillan et al., 2021Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 1-16. https://doi.org/10.1016/j.jcorpfin.2021.101889
https://doi.org/10.1016/j.jcorpfin.2021.... ). The negative findings can be interpreted to mean that companies invest in activities that they consider to be more profitable than ESG, and therefore this disclosure tends to provide lower financial performance and market value (Li et al., 2018Li, Y., Gong, M., Zhang, X.-Y., & Koh, L. (2018). The impact of environmental, social and governance disclosure on firm value: The role of CEO power. The British Accounting Review, 50(1), 60-75. https://doi.org/10.1016/j.bar.2017.09.007
https://doi.org/10.1016/j.bar.2017.09.00... ). The inconclusive results may be related to the fact that ESG activities have higher costs for companies, which can neutralize the benefits of ESG disclosure, resulting in no or even an incipient change in corporate performance (Lin et al., 2020Lin, W. L., Ho, J. A., Ng, S. I., & Lee, C. (2020). Does corporate social responsibility lead to improved firm performance? The hidden role of financial slack. Social Responsibility Journal, 16(7), 957-982. https://doi.org/10.1108/SRJ-10-2018-0259
https://doi.org/10.1108/SRJ-10-2018-0259... ).

The literature discusses a number of theories that support corporate ESG disclosure. One that stands out is agency theory (Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ), which deals with conflicts between agents and principals. According to this theory, ESG investments would be associated with excessive spending, which increase agency conflicts as executives would obtain private benefits at the expense of shareholders (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Ferrell et al., 2016Ferrell, A., Hao, L., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. https://doi.org/10.1016/j.jfineco.2015.12.003
https://doi.org/10.1016/j.jfineco.2015.1... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ). The view based on stakeholder theory argues that managers should be concerned with valuing and satisfying the interests of all the parties involved in the company and not just generating profits for shareholders (Freeman, 1984Freeman, R. E.(1984). Strategic Management: A Stakeholder Approach. London: Pitman.). In this way, a company can use ESG disclosure as a corporate governance mechanism to resolve potential conflicts between managers and stakeholders (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ). There is also the good governance view, which is similar to the view based on stakeholder theory (Ferrell et al., 2016Ferrell, A., Hao, L., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. https://doi.org/10.1016/j.jfineco.2015.12.003
https://doi.org/10.1016/j.jfineco.2015.1... ), as it is related to well-governed management decisions and transparency. The research that has used these theories has not yet found a consensus in the results, and all are concerned with managerial incentives (Ferrell et al., 2016Ferrell, A., Hao, L., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. https://doi.org/10.1016/j.jfineco.2015.12.003
https://doi.org/10.1016/j.jfineco.2015.1... ), facts that motivate the analysis of the effect of ESG disclosure on PPS.

The studies on PPS are inconclusive (Aguiar & Pimentel, 2017Aguiar, A. B., & Pimentel, R. C. (2017). Remuneração de executivos e desempenho no mercado brasileiro: relações contemporâneas e defasadas. Revista de Administração Contemporânea, 21(4), 545-568. https://doi.org/10.1590/1982-7849rac2017160228
https://doi.org/10.1590/1982-7849rac2017... ; Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... ; Iglesias et al., 2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ; Iyengar & Sundararajan, 2021Iyengar, R. J., & Sundararajan, M. (2021). CEO pay sensitivities in innovative firms. Benchmarking: An International Journal, 28(8), 2365-2381. https://doi.org/10.1108/BIJ-09-2020-0491
https://doi.org/10.1108/BIJ-09-2020-0491... ). In addition, studies on the impact of ESG disclosure on executive pay (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Gillan et al., 2010Gillan, S., Hartzell, J. C., Koch, A., & Starks, L. T. (2010). Firms’ environmental, social and governance choices, performance and managerial motivation. Working Paper, 1-45. Retrieved from: https://sites.pitt.edu/~awkoch/ESG%20Nov%202010.pdf
https://sites.pitt.edu/~awkoch/ESG%20Nov... ; Jian & Lee, 2015Jian, M., & Lee, K. W. (2015). CEO compensation and corporate social responsibility. Journal of Multinational Financial Management, 29, 46-65. https://doi.org/10.1016/j.mulfin.2014.11.004
https://doi.org/10.1016/j.mulfin.2014.11... ; Karim et al., 2018Karim, K., Lee, E., & Suh, S. (2018). Corporate social responsibility and CEO compensation structure. Advances in Accounting, 40, 27-41. https://doi.org/10.1016/j.adiac.2017.11.002
https://doi.org/10.1016/j.adiac.2017.11.... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ) and the moderating effect of ESG disclosure on the sensitivity of executive pay to market performance (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ; Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ), a relationship that has not been identified in the national literature, are scarce and inconclusive from a theoretical and empirical point of view.

According to Rath et al. (2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ), the top management of companies with ESG disclosures tends to receive lower salaries and engage in ESG activities to improve the institution's performance and benefit stakeholders. Companies with CSR tend to share more resources with stakeholders, leaving fewer resources available for management (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ). Thus, CSR disclosures act as a constraint on excessive CEO pay. Therefore, greater CSR engagement is associated with greater PPS (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ). Companies with ESG disclosures show greater pay sensitivity to shareholder wealth because these disclosures help companies align CEO incentives with shareholder interests, which increases the congruence of company performance with financial and non-financial measures (Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ). Chang et al. (2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ) found that CSR engagement helps companies strengthen the positive link between top management pay and corporate performance, meaning that greater CSR engagement increases the sensitivity of pay to performance. Cho and Ibrahim (2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ) also found evidence that PPS is stronger in companies with ESG disclosures.

On the other hand, based on the agency view (Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ), CSR disclosure can benefit management to the detriment of other stakeholders, causing agency problems due to the weak link between executive pay and corporate performance. Thus, greater CSR disclosure is associated with lower PPS (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ). Rath et al. (2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ) found that when ESG disclosure and financial and market performance increase, CEO pay decreases. These positive and negative views on the effects of ESG disclosure on PPS (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ; Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ) motivate this research.

In this sense, this research seeks to add more studies in the national context and bring new evidence on PPS, which lacks greater disclosure in Brazil and needs more clarification (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Iglesias et al., 2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ). Therefore, the gap identified based on the previous literature relates to the possibility of investigating the factors that affect the sensitivity of executive pay to market performance, in order to seek explanations for the effect of ESG disclosure on PPS, in addition to identifying which theoretical perspective (agency theory, stakeholder theory or the good governance view) makes it possible to support this result for Brazilian companies.

Based on the above, in order to contribute to the discussion on the topics proposed in the academic literature, the study seeks to answer the following research question: What is the moderating effect of ESG disclosure on the sensitivity of executive pay to market performance in Brazilian companies listed in the B3 IBrX-100 index?

This study is justified by the relevance of executive pay linked to shareholders' interests, which motivates managers, through company performance (Tirole, 2006Tirole, J. (2006). The Theory of Corporate Finance. Princeton University press.), to act in the alignment of interests between agents and principals (Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ), thus contributing to the understanding of the effectiveness of corporate governance (CG) mechanisms in the Brazilian capital market (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ). The determination of executive pay packages remains an issue that deserves attention, "due to the possible problems that may arise from excessive or insufficient CEO compensation"(Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... , p. 1). Therefore, it is necessary to understand how CEO pay can be affected by market performance and other possible factors that can influence PPS. In the case of this research, this means understanding whether or not ESG disclosure contributes to the extraction of shareholder income by the CEO (Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... ). Thus, this study advances in relation to national research on PPS (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Iglesias et al., 2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ) by including ESG disclosure in this analysis as a factor influencing the sensitivity of executive pay to market performance.

This research is justified by its theoretical, practical and social contributions. From a theoretical point of view, it contributes to the literature on managerial incentives by analyzing PPS (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Iglesias et al., 2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ) and by expanding the research on the topic, shedding light on a new analysis perspective by introducing ESG disclosure to verify its possible influence on PPS, introducing the discussion of the ESG issue in the proposed relationship in the national context and identifying the theory that supports such relationships in the Brazilian context.

In terms of practical contributions, the findings could be used to implement compensation policies and incentives for ESG disclosure, as this practice could influence the mitigation of agency problems. The results could be useful in developing ESG strategies, as they can influence PPS and preserve shareholder wealth. By knowing the influence of ESG disclosure, shareholders as capital holders will be able to make decisions to ensure that such disclosures are maintained (Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... ).

In terms of social contributions, the results of this research can help society by making organizations aware of the importance of disclosing ESG issues and highlighting their potential impact on management, the environment and society in general. By highlighting the impact of ESG disclosure by companies, this research could motivate this form of management, which has a direct impact on society, given the importance that socio-environmental investments can have for the community.

2. THEORETICAL FRAMEWORK AND RESEARCH HYPOTHESES

2.1 Sensitivity of Executive Pay to Market Performance

Executive pay, when linked to the interests of the principal, creates incentives for managers through motivation based on firm performance (Tirole, 2006Tirole, J. (2006). The Theory of Corporate Finance. Princeton University press.) to reduce agency conflicts between agents and principals (Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ). In this way, "compensation plans are designed to align the risk aversion and private interests of executives with those of shareholders" (Murphy, 1999Murphy, K. J. (1999). Executive compensation. In O. Ashenfelter, D. Card (Eds.), Handbook of Labor Economics(Vol. 3, pp. 2485-2563). https://doi.org/10.1016/S1573-4463(99)30024-9
https://doi.org/10.1016/S1573-4463(99)30... , p. 2519). Compensation contracts are efficient when they balance the agency costs of getting the agent to assume the risk, plus the benefits of obtaining greater effort from the executive on behalf of the principal (Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Holmström, 1979Holmström, B. (1979). Moral hazard and observability. Journal of Economics, 10(1), 74-91. https://doi.org/10.2307/3003320
https://doi.org/10.2307/3003320... ).

In this sense, the sensitivity of executive pay to market performance (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ) examines whether the compensation policy is effective (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ). As mentioned previously, this study is based on the model by Jensen and Murphy (1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ), which "regressed the increase in each monetary unit of CEO pay on the increase in each 1,000 monetary units of market value of US companies" (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... apud Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... , p. 33), which justifies the use of market value to measure market performance in PPS. In other words, PPS verifies the "increase in each monetary unit of manager pay per thousand monetary units of market value" (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... , p. 30).

A high PPS may indicate that interests are aligned, while the opposite may show that the executive's pay is not dependent on market performance, indicating the possibility of the emergence of a fat cat, an expression used by Chang et al. (2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... , p. 1184) alluding to the fact that executives receive a lot of money without putting in an effort for shareholders. In this way, executives may be compensated beyond their efforts (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ; Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ) and remunerated without market performance (Bebchuk & Fried, 2003Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362
https://doi.org/10.1257/0895330037692043... ; Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ), which justifies the importance of efficient contracts (Blanes et al., 2020Blanes, F., Fuentes, C., & Porcuna, R. (2020). Executive remuneration determinants: New evidence from meta-analysis. Economic research-Ekonomska istraživanja, 33(1), 1-23. https://doi.org/10.1080/1331677X.2019.1678503
https://doi.org/10.1080/1331677X.2019.16... ; Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Holmström; 1979Holmström, B. (1979). Moral hazard and observability. Journal of Economics, 10(1), 74-91. https://doi.org/10.2307/3003320
https://doi.org/10.2307/3003320... ).

When compensation is not aligned with market performance, the payment of excessive compensation may be due to "managerial power and the associated act of extracting income for the manager's personal benefit" (Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... , p. 13). Since excessive CEO pay is a manifestation of agency costs, it is necessary to use efficient corporate governance practices to align the interests of shareholders and executives (Alves et al., 2016Alves, P., Couto, E. B., & Francisco, P. M. (2016). Executive pay and performance in Portuguese listed companies. Research in International Business and Finance, 37, 184-195. https://doi.org/10.1016/j.ribaf.2015.11.006
https://doi.org/10.1016/j.ribaf.2015.11.... ). One mechanism to mitigate the agency problem can be the use of performance pay (Holmström, 1979Holmström, B. (1979). Moral hazard and observability. Journal of Economics, 10(1), 74-91. https://doi.org/10.2307/3003320
https://doi.org/10.2307/3003320... ; Tirole, 2006Tirole, J. (2006). The Theory of Corporate Finance. Princeton University press.).

In the same vein, Raithatha and Komera (2016Raithatha, M., & Komera, S. (2016). Executive compensation and firm performance: Evidence from Indian firms. IIMB Management Review, 28(3), 160-169. https://doi.org/10.1016/j.iimb.2016.07.002
https://doi.org/10.1016/j.iimb.2016.07.0... ) argue that, according to agency theory, incentive contracts should be designed to align the interests of managers with those of shareholders. However, designing an efficient contract is complex because shareholders want managers to maximize the value of their wealth. However, it is not possible to accurately verify the manager's efforts, which could be used to serve private interests and deviate from strategies to maximize the value of the company (Bebchuk & Fried, 2003Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362
https://doi.org/10.1257/0895330037692043... ; Holmström, 1979Holmström, B. (1979). Moral hazard and observability. Journal of Economics, 10(1), 74-91. https://doi.org/10.2307/3003320
https://doi.org/10.2307/3003320... ; Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ; Raithatha & Komera, 2016Raithatha, M., & Komera, S. (2016). Executive compensation and firm performance: Evidence from Indian firms. IIMB Management Review, 28(3), 160-169. https://doi.org/10.1016/j.iimb.2016.07.002
https://doi.org/10.1016/j.iimb.2016.07.0... ).

The evidence found in the literature is mixed, and the results on the sensitivity of executive pay to market performance are still inconclusive (Aguiar & Pimentel, 2017Aguiar, A. B., & Pimentel, R. C. (2017). Remuneração de executivos e desempenho no mercado brasileiro: relações contemporâneas e defasadas. Revista de Administração Contemporânea, 21(4), 545-568. https://doi.org/10.1590/1982-7849rac2017160228
https://doi.org/10.1590/1982-7849rac2017... ; Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... ; Iglesias et al., 2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ; Iyengar & Sundararajan, 2021Iyengar, R. J., & Sundararajan, M. (2021). CEO pay sensitivities in innovative firms. Benchmarking: An International Journal, 28(8), 2365-2381. https://doi.org/10.1108/BIJ-09-2020-0491
https://doi.org/10.1108/BIJ-09-2020-0491... ). There are studies that have found positive effects (Aguiar & Pimentel, 2017Aguiar, A. B., & Pimentel, R. C. (2017). Remuneração de executivos e desempenho no mercado brasileiro: relações contemporâneas e defasadas. Revista de Administração Contemporânea, 21(4), 545-568. https://doi.org/10.1590/1982-7849rac2017160228
https://doi.org/10.1590/1982-7849rac2017... ; Alves et al., 2016Alves, P., Couto, E. B., & Francisco, P. M. (2016). Executive pay and performance in Portuguese listed companies. Research in International Business and Finance, 37, 184-195. https://doi.org/10.1016/j.ribaf.2015.11.006
https://doi.org/10.1016/j.ribaf.2015.11.... ; Amzaleg et al., 2014Amzaleg, Y., Azar, O. H., Ben-Zion, U., & Rosenfeld, A. (2014). CEO control, corporate performance and pay-performance sensitivity. Journal of Economic Behavior & Organization, 106, 166-174. https://doi.org/10.1016/j.jebo.2014.07.004
https://doi.org/10.1016/j.jebo.2014.07.0... ; Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Iyengar & Sundararajan, 2021Iyengar, R. J., & Sundararajan, M. (2021). CEO pay sensitivities in innovative firms. Benchmarking: An International Journal, 28(8), 2365-2381. https://doi.org/10.1108/BIJ-09-2020-0491
https://doi.org/10.1108/BIJ-09-2020-0491... ; Lei et al., 2019Lei, Q., Lu, R., & Ren, L. (2019). Non-CEO top managers’ monitoring power and CEO pay-performance sensitivity in state-owned enterprises: Evidence from Chinese state-owned listed firms. China Journal of Accounting Research, 12(4), 411-430. https://doi.org/10.1016/j.cjar.2019.10.001
https://doi.org/10.1016/j.cjar.2019.10.0... ; Ouyang et al., 2019Ouyang, C., Xiong, J., & Fan, L. (2019). Do insiders share pledging affect executive pay-for-performance sensitivity? International Review of Economics & Finance, 63, 226-239. https://doi.org/10.1016/j.iref.2018.10.019
https://doi.org/10.1016/j.iref.2018.10.0... ; Yang et al., 2021Yang, H. Y., Yao, D., & Qu, X. (2021). How does independent directors’ reputation influence pay‐for‐performance? Evidence from China. Accounting & Finance, 62(1), 959-1007. https://doi.org/10.1111/acfi.12815
https://doi.org/10.1111/acfi.12815... ; Zhou et al., 2017Zhou, F., Fan, Y., An, Y., & Zhong, L. (2017). Independent directors, non-controlling directors, and executive pay-for-performance sensitivity: Evidence from Chinese non-state owned enterprises. Pacific-Basin Finance Journal, 43, 55-71. https://doi.org/10.1016/j.pacfin.2017.02.003
https://doi.org/10.1016/j.pacfin.2017.02... ), others negative (Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... ), mixed (Raithatha & Komera, 2016Raithatha, M., & Komera, S. (2016). Executive compensation and firm performance: Evidence from Indian firms. IIMB Management Review, 28(3), 160-169. https://doi.org/10.1016/j.iimb.2016.07.002
https://doi.org/10.1016/j.iimb.2016.07.0... ), or not statistically significant (Iglesias et al., 2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ).

Based on agency theory and the above arguments, it is expected that executive pay will be sensitive to market performance, i.e. the existence of PPS is assumed, which is verified by a positive and significant coefficient. Therefore, the objective is to determine whether executive pay is sensitive to market performance in Brazilian companies listed in the IBrX-100. The following hypothesis (H₁) is formulated: There is a positive relationship between market performance and executive pay in Brazilian companies.

2.2 ESG Disclosure and Pay-Performance Sensitivity

The term ESG was developed in a 2004 report by CEOs of financial institutions in response to a call by Kofi Annan (Who Cares Wins). ESG refers to how investors and companies integrate environmental, social and governance issues into their business models (Gillan et al., 2021Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 1-16. https://doi.org/10.1016/j.jcorpfin.2021.101889
https://doi.org/10.1016/j.jcorpfin.2021.... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ). ESG disclosure is a set of environmental, social and governance factors that have taken shape due to the social concerns of corporate investments. These factors shed light on the evaluation of businesses by socially responsible investors (Monteiro et al., 2021Monteiro, G. F. A., Miranda, B. V., Rodrigues, V. P., & Saes, M. S. M. (2021). ESG: disentangling the governance pillar. RAUSP Management Journal, 56(4), 482-487. https://doi.org/10.1108/RAUSP-06-2021-0121
https://doi.org/10.1108/RAUSP-06-2021-01... ; Pedersen et al., 2021Pedersen, L. H., Fitzgibbons, S., & Pomorski, L. (2021). Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 142(2), 572-597. https://doi.org/10.1016/j.jfineco.2020.11.001
https://doi.org/10.1016/j.jfineco.2020.1... ).

Below is a breakdown of each pillar of ESG disclosure, highlighting the sub-dimensions of each pillar according to the Refinitiv Eikon® database (2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ). The environmental pillar is related to three main categories: resource use, emissions and innovation (Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ). Resource use relates to the efficient use of natural resources (eco-efficient company). The emissions category refers to issues such as the company's commitment and effectiveness in reducing emissions and waste in its processes. The innovation category refers to issues such as green revenues, research and development and product innovation, and clean energy products (Bătae et al., 2021Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 1-21. https://doi.org/10.1016/j.jclepro.2021.125791
https://doi.org/10.1016/j.jclepro.2021.1... ; IBGC, 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ; Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ).

The social pillar includes the workforce, human rights, community and product responsibility categories (Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ). The workforce category measures a company's effectiveness in terms of employee satisfaction, the existence of a healthy and safe workplace, and the maintenance of diversity and equal opportunities. The human rights category measures a company's effectiveness in upholding fundamental conventions on individual rights. The community category measures a company's commitment to corporate citizenship, public health and business ethics. The product responsibility category represents a company's ability to produce quality goods and services while addressing issues related to customer health and safety, integrity and data privacy (Bătae et al., 2021Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 1-21. https://doi.org/10.1016/j.jclepro.2021.125791
https://doi.org/10.1016/j.jclepro.2021.1... ; IBGC, 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ; Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ).

The governance pillar consists of the following categories: management, CSR strategies and shareholders (Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ). The management category measures a company's commitment to, and effectiveness in, good corporate governance practices. CSR strategies reflect a company's practices to communicate that it integrates economic (financial), social and environmental dimensions into its decision making, covering issues such as disclosure and transparency. The shareholders category measures a company's effectiveness in treating its shareholders equally (Bătae et al., 2021Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 1-21. https://doi.org/10.1016/j.jclepro.2021.125791
https://doi.org/10.1016/j.jclepro.2021.1... ; IBGC, 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ; Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ).

Kim and Li (2021Kim, S., & Li, Z. F. (2021). Understanding the impact of ESG practices in corporate finance. Sustainability, 13(7), 1-15. https://doi.org/10.3390/su13073746
https://doi.org/10.3390/su13073746... ) argue that companies are increasingly committed to ESG in order to be recognized as socially responsible. According to the IBGC (2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ), companies approach ESG investing as a strategic vision. Just as it is possible to find arguments in the literature arguing that ESG disclosures can help reduce information asymmetries, enhance organizational legitimacy and improve reputation, there are also opinions that these disclosures can be harmful if investors view such a practice as greenwashing, which refers to a company trying to appear to be more aware of ESG disclosure than it actually is (Fatemi et al., 2018Fatemi, A., Glaum, M., & Kaiser, S. (2018). ESG performance and firm value: The moderating role of disclosure. Global Finance Journal, 38, 45-64. https://doi.org/10.1016/j.gfj.2017.03.001
https://doi.org/10.1016/j.gfj.2017.03.00... ).

When analyzing the main theoretical positions on the influence of ESG disclosure on PPS, and according to executive pay, the literature bases possible outcomes of this influence on the perspectives of agency theory, stakeholder theory and the good governance view. According to agency theory (Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ), CSR is considered an agency problem and represents a waste of resources because managers would use such disclosures for their own promotion (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Ferrell et al., 2016Ferrell, A., Hao, L., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. https://doi.org/10.1016/j.jfineco.2015.12.003
https://doi.org/10.1016/j.jfineco.2015.1... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ). Thus, socially responsible investments would reduce PPS and increase executive pay, since in this case we would have an excess of investments in this area as a result of the private interests of executives who seek to invest to enhance their reputation and image. As a result, there would be better job opportunities and they would be able to negotiate better salaries. In this way, executives would have high compensation without corresponding market performance, which would decrease the value of the firm (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Ferrell et al., 2016Ferrell, A., Hao, L., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. https://doi.org/10.1016/j.jfineco.2015.12.003
https://doi.org/10.1016/j.jfineco.2015.1... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ).

On the other hand, the stakeholder theory view (Freeman, 1984Freeman, R. E.(1984). Strategic Management: A Stakeholder Approach. London: Pitman.) and the good governance view argue that socially responsible investments would improve PPS and executive pay would be more aligned (lower), i.e., investments in this area are associated with greater PPS and lower excess compensation. The stakeholder theory view (Freeman, 1984Freeman, R. E.(1984). Strategic Management: A Stakeholder Approach. London: Pitman.) is based on valuing all stakeholders, and ESG disclosure, as well as socially responsible investing, can be used as a business strategy to resolve conflicts between managers and stakeholders and increase shareholder value (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Deng et al., 2013Deng, X., Kang, J. K., & Low, B. S.(2013). Corporate social responsibility and stakeholder value maximization: Evidence from mergers. Journal of Financial Economics, 110(1), 87-109. https://doi.org/10.1016/j.jfineco.2013.04.014
https://doi.org/10.1016/j.jfineco.2013.0... ; Karim et al., 2018Karim, K., Lee, E., & Suh, S. (2018). Corporate social responsibility and CEO compensation structure. Advances in Accounting, 40, 27-41. https://doi.org/10.1016/j.adiac.2017.11.002
https://doi.org/10.1016/j.adiac.2017.11.... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ). In the case of the good governance view, the literature argues that socially responsible companies generally adhere to corporate governance practices that increase shareholder value. According to this perspective, companies are well-managed, managers are properly incentivized, and they invest appropriately in socially responsible issues (Ferrell et al., 2016Ferrell, A., Hao, L., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. https://doi.org/10.1016/j.jfineco.2015.12.003
https://doi.org/10.1016/j.jfineco.2015.1... ).

Given the different theoretical perspectives (agency theory, stakeholder theory and the good governance view), attempts were made to analyze the effect of ESG disclosure on executive pay and the effect of ESG disclosure on the sensitivity of executive pay to market performance. Studies examining the impact of CSR and ESG disclosure on executive pay are inconclusive, with results that are positive (Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ), negative (Cai et al., 2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ; Gillan et al., 2010Gillan, S., Hartzell, J. C., Koch, A., & Starks, L. T. (2010). Firms’ environmental, social and governance choices, performance and managerial motivation. Working Paper, 1-45. Retrieved from: https://sites.pitt.edu/~awkoch/ESG%20Nov%202010.pdf
https://sites.pitt.edu/~awkoch/ESG%20Nov... ; Jian & Lee, 2015Jian, M., & Lee, K. W. (2015). CEO compensation and corporate social responsibility. Journal of Multinational Financial Management, 29, 46-65. https://doi.org/10.1016/j.mulfin.2014.11.004
https://doi.org/10.1016/j.mulfin.2014.11... ), mixed (Karim et al., 2018Karim, K., Lee, E., & Suh, S. (2018). Corporate social responsibility and CEO compensation structure. Advances in Accounting, 40, 27-41. https://doi.org/10.1016/j.adiac.2017.11.002
https://doi.org/10.1016/j.adiac.2017.11.... ) and without statistical significance (Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ), as well as the incipient evidence found in the literature testing the effect of ESG disclosure on PPS (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ; Cho & Ibrahim, 2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ; Rath et al., 2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ). However, this effect is inconclusive from a theoretical and practical point of view, and no studies were found in the national literature that analyzed the moderating effect of ESG disclosure and its pillars on PPS.

Based on agency theory, stakeholder theory and the good governance view, and on the arguments mentioned above, it is not possible to define in advance the sign of the hypothesis to be tested (whether positive or negative) for Brazilian companies, given that the scenario is unknown (lack of empirical evidence relating these theories in the national context) and the fact that they are theories with opposing views. Thus, according to the results found, it was possible to identify which theory best explains the relationships proposed for the companies in the sample in the Brazilian context, representing a contribution of this study.

To this end, attempts were made to identify the direct effect (positive/negative) of ESG disclosure on executive pay and the moderating effect (positive/negative) of ESG disclosure and its pillars on the sensitivity of executive pay to the market performance of Brazilian IBrX-100 companies, giving rise to the second hypothesis (H₂): There is a relationship between ESG and environmental (H_2a), social (H_2b) and governance (H_2c) disclosure and executive pay in Brazilian companies; and the third hypothesis (H₃): There is a moderating effect of ESG and environmental (H_3a), social (H_3b) and governance (H_3c) disclosure on the sensitivity of executive pay to market performance.

2.3 Theoretical Analysis Model

Figure 1 shows the theoretical model, which summarizes the proposed relationships.

Figure 1
Theoretical analysis model

3. METHODOLOGICAL PROCEDURES

3.1 Research Design, Population and Sample

A quantitative, descriptive and documentary study was conducted to achieve the objectives of this research. The study population included the companies listed in the B3's IBrX-100 theoretical portfolio, which corresponds to the 100 most tradable and representative assets in the Brazilian stock market. The portfolio used in this study refers to the period May-August 2022. The choice to analyze companies from the IBrX-100 theoretical portfolio is due to the fact that this group contains the most representative companies in the Brazilian capital market (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ; Iglesias et al., 2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ).

Of the 100 companies whose stocks made up the IBrX-100 theoretical portfolio, three with two stocks in the portfolio were dropped, leaving a total of 97 companies. Of these, 16 were excluded because they did not have the necessary information for the analysis, 11 of which were due to missing ESG data for the entire period, indicating a limitation of the study. Thus, the final sample consisted of 81 companies in a universe of approximately 387 unbalanced observations. The data analyzed in this study covers the period from 2016 to 2021.

3.2 Data Collection and Research Construct

Table 1 presents the study construct, which includes a description of the variables, their respective operationalizations, the source of the data collection, and the authors who have used these variables in their research and support their use in this study.

ESG disclosure includes ten categories across the environmental, social and governance pillars: resource use, emissions, innovation, workforce, human rights, community, product responsibility, management, CSR strategies and shareholders. Refinitiv Eikon® provides overall ESG, environmental, social, governance, combined ESG and ESG controversy scores (collected from global media sources). These scores are calculated through questionnaires sent to companies and are designed to transparently and objectively measure a company's ESG performance, commitment and effectiveness, based on the data it reports (Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ). Companies answer questions with yes, no or nil, and the data are converted into numerical values to calculate the percentage score (Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ).

Refinitiv Eikon® collects and calculates more than 630 company-level ESG metrics, from which a subset of 186 of the most comparable and material metrics by sector drive the overall company evaluation and scoring process. Weights vary by industry for the environmental and social categories. Governance weights are the same for all sectors. Pillar weights are normalized to percentages ranging from zero to 100. It is important to note that some indicators are sector-specific and, therefore, not relevant for all companies. Therefore, if the indicator is not relevant, it is excluded from the calculation of ESG scores (Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ).

3.3 Econometric Model Specification and Robustness Test

The empirical model used to measure the sensitivity of executive pay to market performance (PPS) is that proposed by Jensen and Murphy (1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... , p. 227). To analyze hypothesis H₁, the regressions presented in Equations 1 and 2 were operationalized, and for hypothesis H₂, Equations 3 and 4 were operationalized. For hypothesis H₃, the main equations (Equations 1 and 2) included the ESG disclosure variables and an additional interaction term between them and market performance. The equations used are shown in Equations 5 and 6. In models 3, 4, 5 and 6, the ESG variable was replaced by the individual aspects (environmental, social and governance). It should be noted that the ∆MV variable, when included in models 5 and 6, had values not recommended by the variance inflation factor (VIF) literature and was therefore not considered individually in these regression models.

Ordinary least squares (OLS) regression models were estimated with robust standard errors and sector and year controls. First, all continuous variables were winsorized in order to minimize the effect of outliers in the sample. The VIF test (Fávero et al., 2009Fávero, L. P., Belfiore, P., Silva, F. L., & Chan, B. L. (2009). Análise de dados: modelagem multivariada para tomada de decisões (2a ed.). Rio de Janeiro: Elsevier.) was used to identify multicollinearity problems, and the Durbin-Watson test (Hair et al., 2009Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. (2009). Análise Multivariada de Dados (6a ed.). Bookman.) was used to identify autocorrelation problems. In addition, descriptive statistics of the variables and Pearson's correlation matrix were used to identify the correlation between the variables.

As a robustness test, quantile regressions were run to check how the variables behave in the quantiles, for example, when the variation in compensation is low, median, or high. The quantiles were chosen arbitrarily by the researcher. The use of quantile regression is recommended in research using accounting and financial data, since heteroscedasticity and outliers are common in these types of data. In this way, this estimation method is more robust and less sensitive to the conditions present in the data in this area of research (Duarte et al., 2017Duarte, F. C. L., Girão, L. F. A. P., & Paulo, E. (2017). Avaliando modelos lineares de value relevance: Eles captam o que deveriam captar? Revista de Administração Contemporânea, 21, 110-134. https://doi.org/10.1590/1982-7849rac2017160202
https://doi.org/10.1590/1982-7849rac2017... ).

4. RESULTS

4.1 Descriptive Statistics

Table 2 presents the descriptive statistics for the variables.

Panel A shows the descriptive statistics for executive compensation (total and per capita) and market value in their original amounts (in units of reais for compensation and in thousands of reais for market value). It can be seen that the average pay of the executive board in the period analyzed for the companies in the sample reaches a value of around R$ 47 million, while the average per capita compensation reaches a value of around R$ 5.3 million, both higher than the sample obtained by Brandão et al. (2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ) when studying the period from 2013 to 2015, as well as Iglesias et al. (2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ) for the average compensation in the period from 2014 to 2018. It can be seen that the annual variation in executive pay is high, a behavior similar to that shown by Brandão et al. (2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ).

Regarding the market value of the companies in the sample, the average value over the period is R$45.8 million, with an increase in value over the interval analyzed (coefficient of variation of 4.15), which is different from the study by Brandão et al. (2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ), in which there was a significant loss. The average market value in this study is higher than that found by Brandão et al. (2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ) and Iglesias et al. (2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ), with the latter showing an intermediate value between the study by Brandão et al. (2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ) and this study.

In addition to the descriptive statistics for the gross values, Panels B and C show the descriptive statistics of the variables used in the statistical analysis. It can be seen that the variation in total and per capita compensation, as well as the variation in market value, have positive averages (∆COMT = 0.187; ∆REMPC = 0.041; ∆MV = 0.155), indicating that there was an average growth in director pay and market value during the period under study, which differs from the study by Brandão et al. (2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ), who found a positive average variation in total compensation and per capita compensation, but a negative average variation in market value, while Iglesias et al. (2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ) showed a negative average variation in total compensation, indicating a decrease in executive pay over the period, and a positive average variation in market value.

As for the control variables, the compensation committee (COMC) represents approximately 40% of the observations in the sample. As for the concentration of voting rights (PROP), on average 38.8% of the ordinary shares are held by the company's largest shareholder. Accounting performance, measured by return on assets (ROA), showed a positive average result (0.042). Financial slack (FS) had a positive average and was greater than 1 (1.628). The SIZE variable showed homogeneous behavior. The average size of the companies is 17.260.

With respect to the moderating variables (ESG and its pillars), according to the descriptive statistics in Panel C, the average ESG disclosure score of the companies in the sample is 56.80%, with a minimum of 20.40% and a maximum of 85.40%. For the environmental, social and governance pillars, the average scores are 54.00%, 60.10% and 55.50%, respectively, with the minimum scores being 9.40%, 23.20% and 17.90%, and the maximum scores being 88.50%, 91.10% and 87.70%, in that order. It can be seen that among the three pillars, the companies in this study have the lowest score in the environmental area and the highest in the social area. The same goes for the average score, which partially corroborates the findings of Rath et al. (2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ), who observed in the Indian context a lower average and minimum score for the environmental pillar and maximum value for the social pillar, but with a higher average score in the governance pillar.

After the descriptive statistics, a correlation was performed to check for problems of multicollinearity, which, according to the results of the correlation matrix, were not identified between the variables used in the regression models (Hair et al., 2009Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. (2009). Análise Multivariada de Dados (6a ed.). Bookman.).

4.2 Regression Analysis and Robustness Test

Table 3 presents the results of the study equations. It shows the existence of PPS (Panel A), the effect of ESG disclosure on executive pay (Panel B), and the moderating effect of ESG disclosure on PPS (Panel C).

According to Table 3, the regression models were significant at the 1% level, confirming their validity. The R² indicates that the independent variables explain, on average, 23.70% of the variation in total compensation and 24.68% of the variation in per capita compensation. The result of the Durbin-Watson test shows values close to two, which indicates the reliability of the data (Hair et al., 2009Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. (2009). Análise Multivariada de Dados (6a ed.). Bookman.). No multicollinearity problems were observed, as the VIF for the models was a maximum of 1.86 (Fávero et al., 2009Fávero, L. P., Belfiore, P., Silva, F. L., & Chan, B. L. (2009). Análise de dados: modelagem multivariada para tomada de decisões (2a ed.). Rio de Janeiro: Elsevier.).

With regard to estimations 1 and 2 (Panel A), it can be seen that the variation in market value (∆MV) has a positive and significant impact, at the 1% level, on the variation in executive directors’ compensation, both with respect to the variation in total compensation (∆COMT) and in relation to per capita compensation (∆COMPC). By including the ESG variables and the environmental, social and governance pillars in the models (Equations 3 and 4, Panel B), it can be seen that in all the estimations the positive and significant influence of the variation in market value on the variation in executive compensation (∆COMT and ∆COMPC) was maintained at the 1% level, showing that PPS is maintained in the presence of the ESG variables. With respect to the variables for ESG and its pillars, it can be seen that ESG disclosure and the environmental pillar only had an impact on the variation in per capita compensation, which was negative and statistically significant at the 1% and 5% levels, respectively. These findings show that higher general and environmental ESG scores result in a lower variation in per capita pay. The social score negatively affected the variation in total executive compensation and per capita compensation, with statistical significance at the 10% and 1% levels, respectively. The results show that the greater the companies’ social disclosure, the lower their executive pay tends to be, both in terms of the variation in total pay and in terms of the variation in per capita pay. The governance variable, although negative, was not statistically significant in these models.

When analyzing the moderating effect of ESG disclosure on the sensitivity of executive pay to market performance (Equations 5 and 6, Panel C), the results show negative effects of the individual variables ESG, environmental and social scores, which are significant at the 5%, 10% and 5% levels, respectively, for total pay, and significant at the 1% level for per capita pay. The governance pillar alone, although also having a negative coefficient, did not show a statistically significant relationship in any of the estimations. Looking at the moderating effect of the variables for ESG and its pillars, the interactions between the variation in market value and the ESG (∆MV*ESG), environmental (∆MV*ENV), social (∆MV*SOC) and governance (∆MV*GOV) scores were positive and significant at the 1% level. It should be noted that when looking at the coefficients of the ∆MV variable for total and per capita compensation (estimates 1 and 2) compared to the coefficients of the moderating variables (estimates 5 and 6), it can be seen that the coefficients of the interactive variables are higher, indicating the predominance of the moderating effect.

With regard to the robustness test based on the quantile regressions, PPS, as well as the direct effect of the ESG variables on executive pay and their moderating effect on PPS, appear in most of the estimations carried out in the highest quantiles, i.e. in the cases where the variation in executive pay is greatest. It was found that the sign of the coefficient of the relationships tested remained the same, with a positive coefficient for PPS, a negative coefficient for the direct relationship between ESG and compensation, and a positive coefficient for the interactive variables in PPS. The results of the robustness test confirm the results of the main analysis, indicating the relevance of the values found.

4.3 Discussion

The purpose of this section is to review the results on PPS (H1), the results on the effect of ESG disclosure on executive pay (H2) and the moderating effect of ESG disclosure on PPS (H3). Based on these, the proposed hypotheses are discussed along with their implications and a review of the theory underlying the results. In this way, the findings of this study can be understood from both a theoretical and an empirical perspective.

Regarding the existence of sensitivity of executive pay to market performance (estimations 1 and 2), the ∆MV variable showed a positive and significant coefficient (at the 1% level) for ∆COMT and ∆COMPC. This finding indicates that executive pay is sensitive to market performance (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ). Therefore, hypothesis H1, that there is a positive relationship between market performance and executive pay in Brazilian companies, cannot be rejected, which provides evidence that executive pay depends on market performance and indicates that interests are aligned (Chang et al., 2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ). The results of the estimations to answer H1 support the perspectives of agency theory, as the results confirm the existence of PPS. These results corroborate the findings of Aguiar and Pimentel (2017Aguiar, A. B., & Pimentel, R. C. (2017). Remuneração de executivos e desempenho no mercado brasileiro: relações contemporâneas e defasadas. Revista de Administração Contemporânea, 21(4), 545-568. https://doi.org/10.1590/1982-7849rac2017160228
https://doi.org/10.1590/1982-7849rac2017... ), Alves et al. (2016Alves, P., Couto, E. B., & Francisco, P. M. (2016). Executive pay and performance in Portuguese listed companies. Research in International Business and Finance, 37, 184-195. https://doi.org/10.1016/j.ribaf.2015.11.006
https://doi.org/10.1016/j.ribaf.2015.11.... ), Brandão et al. (2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ), Iyengar and Sundararajan (2021Iyengar, R. J., & Sundararajan, M. (2021). CEO pay sensitivities in innovative firms. Benchmarking: An International Journal, 28(8), 2365-2381. https://doi.org/10.1108/BIJ-09-2020-0491
https://doi.org/10.1108/BIJ-09-2020-0491... ), Raithatha and Komera (2016Raithatha, M., & Komera, S. (2016). Executive compensation and firm performance: Evidence from Indian firms. IIMB Management Review, 28(3), 160-169. https://doi.org/10.1016/j.iimb.2016.07.002
https://doi.org/10.1016/j.iimb.2016.07.0... ), and Zhou et al. (2017Zhou, F., Fan, Y., An, Y., & Zhong, L. (2017). Independent directors, non-controlling directors, and executive pay-for-performance sensitivity: Evidence from Chinese non-state owned enterprises. Pacific-Basin Finance Journal, 43, 55-71. https://doi.org/10.1016/j.pacfin.2017.02.003
https://doi.org/10.1016/j.pacfin.2017.02... ), and diverge from Ghrab et al. (2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... ) and Iglesias et al. (2022Iglesias, T. M. G., Silva, T. D., Jesuka, D., & Peixoto, F. M. (2022). Reflexos da Governança Corporativa sobre a Pay-Performance Sensitivity: uma nova perspectiva. Revista de Administração Mackenzie, 23(1), 1-27. https://doi.org/10.1590/1678-6971/eRAMF220088
https://doi.org/10.1590/1678-6971/eRAMF2... ).

In this sense, the variation in market performance (variation in shareholder wealth) positively affects the variation in total and per capita executive compensation. Empirical evidence suggests that PPS exists in firms because a change in executive wealth is associated with a change in shareholder wealth. In this case, an increase in market value helps to explain an increase in executive pay (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ), which reveals the effectiveness of pay policy (Brandão et al., 2019Brandão, I. D. F., Vasconcelos, A. C. D., De Luca, M. M. M., & Crisóstomo, V. L. (2019). Composição do conselho de administração e sensibilidade da remuneração executiva ao desempenho de mercado. Revista Contabilidade & Finanças, 30(79), 28-41. https://doi.org/10.1590/1808-057x201806610
https://doi.org/10.1590/1808-057x2018066... ), which becomes a motivating mechanism when sensitive to market performance (Tirole, 2006Tirole, J. (2006). The Theory of Corporate Finance. Princeton University press.), aligning interests and reducing agency conflicts (Blanes et al., 2020Blanes, F., Fuentes, C., & Porcuna, R. (2020). Executive remuneration determinants: New evidence from meta-analysis. Economic research-Ekonomska istraživanja, 33(1), 1-23. https://doi.org/10.1080/1331677X.2019.1678503
https://doi.org/10.1080/1331677X.2019.16... ; Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ).

Regarding the impact of ESG disclosure on executive pay, the ∆COMT variable was negatively affected by the SOC variable (at 10% statistical significance), while the ∆COMPC variable was negatively related to ESG (at the 1% level), ENV (at the 5% level), and SOC (at the 1% level). GOV did not show a statistically significant relationship in any estimation. Thus, hypothesis H2 that there is a relationship between ESG and environmental (H2a), social (H2b) and governance (H2c) disclosure and executive pay in Brazilian companies is partially rejected.

Specifically, for ESG disclosure (in general) and for the environmental (H2a) and social (H2b) pillars, the hypothesis cannot be rejected, unlike for the governance pillar (H2c). These results are corroborated by the findings of Cai et al. (2011Cai, Y.,Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159-173. https://doi.org/10.1007/s10551-011-0909-7
https://doi.org/10.1007/s10551-011-0909-... ), where investments in CSR were negatively associated with executive pay, and Jian and Lee (2015Jian, M., & Lee, K. W. (2015). CEO compensation and corporate social responsibility. Journal of Multinational Financial Management, 29, 46-65. https://doi.org/10.1016/j.mulfin.2014.11.004
https://doi.org/10.1016/j.mulfin.2014.11... ), who also found a negative and significant relationship, revealing that well-governed companies reduce executives' incentives by increasing investment in CSR. They also differ from the findings of Cho and Ibrahim (2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ), who found no significant relationship, and Rath et al. (2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ), who found a positive and significant relationship between ESG disclosure and executive pay.

Regarding the moderating effect of ESG disclosure on the sensitivity of executive pay to market performance, the interactions between the variation in market value and disclosure of ESG and its pillars (∆MV*ESG, ∆MV*ENV, ∆MV*SOC and ∆MV*GOV) were positive and significant (at the 1% level), suggesting that ESG disclosure increases the sensitivity of executive pay to market performance. Moreover, the moderating effect was predominant, as its coefficients were higher than those shown by the variation in the market value of executive pay in the initial estimates (PPS). Therefore, hypothesis H3, that there is a moderating effect of ESG and environmental (H3a), social (H3b) and governance (H3c) disclosure on the sensitivity of executive pay to market performance, was not rejected.

The aforementioned findings differ from those of Rath et al. (2020Rath, C., Kurniasari, F., & Deo, M. (2020). CEO Compensation and Firm Performance: The Role of ESG Transparency. Indonesian Journal of Sustainability Accounting and Management, 4(2), 278-293. https:// doi.org/10.28992/ijsam.v4i2.225
https:// doi.org/10.28992/ijsam.v4i2.225... ) because the authors interpreted the use of ESG moderation without using the interactive variable, but only observing the behavior of the relationship between performance and compensation by including the ESG variable. However, when observing the behavior of market performance variables with executive pay, they found no PPS, and the negative relationship between market performance and compensation was strengthened by including ESG variables in the models. Chang et al. (2018Chang, Y., Chen, T. H., & Shu, M. C. (2018). Corporate social responsibility, corporate performance, and pay-performance sensitivity - evidence from shanghai stock exchange social responsibility index. Emerging Markets Finance and Trade, 54(5), 1183-1203. https://doi.org/10.1080/1540496X.2016.1273768
https://doi.org/10.1080/1540496X.2016.12... ) also found positive results for the moderation of the CSR variable, but in the sensitivity of pay to accounting performance. Cho and Ibrahim (2021Cho, M., & Ibrahim, S. (2021). Non-financial performance measures and pay-performance sensitivity. Journal of Financial Reporting and Accounting, 1-30. https://doi.org/10.1108/JFRA-01-2021-0018
https://doi.org/10.1108/JFRA-01-2021-001... ) found statistical significance when using the ESG moderator with accounting performance, although it did not show significance with market performance.

The results of the estimations to meet the second and third hypotheses of this research support the perspectives of stakeholder theory and the good governance view. Socially responsible companies are considered to be well governed, with executives properly incentivized and with appropriate investments in socially responsible issues (Ferrell et al., 2016Ferrell, A., Hao, L., & Renneboog, L. (2016). Socially responsible firms. Journal of Financial Economics, 122(3), 585-606. https://doi.org/10.1016/j.jfineco.2015.12.003
https://doi.org/10.1016/j.jfineco.2015.1... ). According to these authors, from a good governance perspective, socially responsible investments are associated with higher PPS or lower excess executive pay, which supports the findings of this research, as the ESG variables reflect higher PPS while resulting in lower remuneration or more adjusted remuneration (Gillan et al., 2021Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 1-16. https://doi.org/10.1016/j.jcorpfin.2021.101889
https://doi.org/10.1016/j.jcorpfin.2021.... ). Similar to this interpretation, according to stakeholder theory, socially responsible practices are negatively associated with remuneration and investments in this area are considered strategic for businesses (Deng et al., 2013Deng, X., Kang, J. K., & Low, B. S.(2013). Corporate social responsibility and stakeholder value maximization: Evidence from mergers. Journal of Financial Economics, 110(1), 87-109. https://doi.org/10.1016/j.jfineco.2013.04.014
https://doi.org/10.1016/j.jfineco.2013.0... ; Karim et al., 2018Karim, K., Lee, E., & Suh, S. (2018). Corporate social responsibility and CEO compensation structure. Advances in Accounting, 40, 27-41. https://doi.org/10.1016/j.adiac.2017.11.002
https://doi.org/10.1016/j.adiac.2017.11.... ), as such companies are concerned with the interests of all stakeholders and not only with generating resources for shareholders (Freeman, 1984Freeman, R. E.(1984). Strategic Management: A Stakeholder Approach. London: Pitman.).

In practice, the evidence shows that greater disclosure of aspects related to resource use, emissions, innovation, workforce, human rights, community, product responsibility, investments in management, CSR strategies and good practices involving shareholders (Bătae et al., 2021Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 1-21. https://doi.org/10.1016/j.jclepro.2021.125791
https://doi.org/10.1016/j.jclepro.2021.1... ; IBGC, 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ; Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ) leads to lower executive pay in terms of a more aligned compensation, and ESG investments increase PPS.

With respect to the environment, the findings of this research indicate that companies that improve supply chain management, have a good performance and capacity to reduce the use of materials, energy or water, and seek to find more eco-efficient solutions, for example (Bătae et al., 2021Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 1-21. https://doi.org/10.1016/j.jclepro.2021.125791
https://doi.org/10.1016/j.jclepro.2021.1... ; IBGC, 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ; Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ), tend to present, in addition to more adjusted executive pay - without excessive payments - investments that contribute to an increase in PPS.

On the social side, the results show that when the company is effective in terms of employee satisfaction - a consequence of a healthy and safe workplace that produces quality goods and services that integrate customer health and safety - its integrity and data privacy, for example (Bătae et al., 2021Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 1-21. https://doi.org/10.1016/j.jclepro.2021.125791
https://doi.org/10.1016/j.jclepro.2021.1... ; IBGC, 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ; Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ), tend to be reflected in lower salaries for its executives (more adjusted salaries), in line with their efforts, thereby increasing PPS.

In terms of governance, the results suggest that even if the company is more committed and effective in following the principles of best governance practices, more effective in terms of equal treatment of shareholders, and more effective in communicating that the organization integrates the economic (financial), social and environmental dimensions in its daily decision-making processes (Bătae et al., 2021Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 1-21. https://doi.org/10.1016/j.jclepro.2021.125791
https://doi.org/10.1016/j.jclepro.2021.1... ; IBGC, 2021Instituto Brasileiro de Governança Corporativa. (2021). Monitoramento de Desempenho Empresarial, 1-115. Retrieved from: https://conhecimento.ibgc.org.br/Paginas/Publicacao.aspx?PubId=24515
https://conhecimento.ibgc.org.br/Paginas... ; Li et al., 2021Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research Progress and Future Prospects. Sustainability, 13(21), 1-28. https://doi.org/10.3390/su132111663
https://doi.org/10.3390/su132111663... ; Refinitiv Eikon®, 2022Refinitiv Eikon. (2022). Environmental, Social and Governance scores from Refinitiv. Retrieved from: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
https://www.refinitiv.com/content/dam/ma... ), these aspects do not tend to have a direct impact on executive pay, but they do tend to increase PPS.

5. CONCLUDING REMARKS

The purpose of this study was to examine the moderating effect of ESG disclosure on the sensitivity of executive pay to market performance (PPS) (Jensen & Murphy, 1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225-264. https://doi.org/10.1086/261677
https://doi.org/10.1086/261677... ). The findings show the existence of PPS in the sample companies, which confirms the tenets of agency theory (Bebchuk & Fried, 2003Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362
https://doi.org/10.1257/0895330037692043... ; Jensen & Meckling, 1976Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900... ). Regarding the effect of ESG disclosure on the proposed relationships, the results showed that disclosure on general ESG and its pillars increases PPS, while directly representing more adjusted compensation. In this way, ESG disclosure contributes to the non-extraction of income from shareholders by executives (Ghrab et al., 2021Ghrab, M., Gana, M., & Dakhlaoui, M. (2021). Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia. Journal of Financial Reporting and Accounting, 1-20. https://doi.org/10.1108/JFRA-06-2020-0152
https://doi.org/10.1108/JFRA-06-2020-015... ), and the results confirm what is suggested by stakeholder theory and the good governance view.

The results contribute to the theory by showing the sensitivity of executive pay to market performance, adding new conclusions and confirming similar ones, revealing possible determinants of executive pay, and contributing to the continuous advancement of the literature in this field of study. Furthermore, by including ESG disclosure as a moderating variable for PPS, this study advances the national literature, as no studies were found in Brazil that verified the effect of ESG disclosure on PPS. This research also identified, for the country's context, which theoretical perspective supports the results found, which sheds light on the possibility of developing new studies to corroborate or counter the results of this research from the point of view of these theories (agency theory, stakeholder theory and the good governance view), encouraging debate and the constant development of the theoretical field.

On a practical level, the findings of this study provide important evidence for stakeholders, particularly potential investors and shareholders, to consider companies' ESG disclosure in their decision making, as it helps to align the interests of executives with those of shareholders.

The results help companies understand the benefits of ESG initiatives, identify these investments in their processes, review their ESG practices and rethink the direction of the organization in terms of sustainable (environmental, social and governance) practices, focusing on socially responsible investments in their planning. It encourages a management style with ESG disclosures, given that shareholders, as capital holders, may demand mechanisms to ensure that ESG disclosures are maintained, as this increases PPS. In addition, these findings could contribute to the implementation of compensation policies.

From a social perspective, the results contribute to society by making organizations aware of the importance of ESG investments in terms of their impact on company management, the environment and society in general. By investing in ESG, companies play an important role in society through activities related to the conscious use of natural resources, the reduction of pollutant emissions, the promotion of CSR strategies, among others. By highlighting the positive impacts of ESG on company management, this research encourages such behavior and contributes to society.

This study has limitations that point to the possibility of future research, such as the small sample size due to the small number of ESG disclosures, which are voluntary in nature. Therefore, we suggest extending this research to all companies listed on the B3 and considering additional measures of ESG disclosure. We also recommend using different market performance measures such as Tobin's Q and market-to-book and adding accounting performance measures such as return on equity (ROE). In addition, we suggest separating out variable compensation to see if the results differ from using total compensation.

Edited by

Editor-in-Chief:

Publication Dates

History