ABSTRACT This study investigates the relationship between executive compensation at focal firms and the environmental, social, and governance (ESG) performance of compensation peer (CP) firms. Despite the growing integration of ESG metrics into executive compensation design, and the mandatory disclosure of CP groups, no prior research has examined whether the ESG performance of CP firms influences focal firm CEO compensation. Drawing on managerial power theory, we hypothesize that CEOs strategically exploit CP benchmarking by selecting peers with superior ESG credentials to justify higher compensation. Using panel data from S&P 1500 firms (2006–2022), we document that CEO compensation at the focal firm is positively associated with higher ESG performance of CP, suggesting that firms in which CP are chosen with high ESG performance generally reward CEOs with greater compensation. Moreover, our additional analysis reveals that higher ESG performance of CP is also positively related to a larger CEO pay slice suggesting that higher ESG performance of CP may lead to an increase in the CEO's pay as compared with the other executives. Importantly, this association is stronger when CEO power is higher and concentrated in firms with weaker governance, consistent with rent extraction rather than efficient contracting. The results are robust to multiple identification strategies including propensity score matching, entropy balancing, lagged specifications, and difference‐in‐differences analysis. The results support managerial power theory, indicating that powerful CEOs may influence CP benchmarking to increase their compensation and pay slice.
Iqbal et al. (2026) studied this question.