Pay for Environmental Performance: The Effect of Incentive Provision on Carbon Emissions

Corporations are increasingly under pressure to improve their environmental performance and to account for potential risks and opportunities associated with climate change. In this paper, we examine the effectiveness of monetary and nonmonetary incentives provided by companies to their employees in order to reduce carbon emissions. Specifically, we find evidence that the use of monetary incentives is associated with higher carbon emissions. This result holds both in cross-sectional and time-series analysis. Moreover, we find that the use of nonmonetary incentives is associated with lower carbon emissions. Consistent with monetary incentives crowding out motivation for pro-social behavior, we find that the effect of monetary incentives on carbon emissions is mitigated when these incentives are provided to employees with formally assigned responsibility for environmental performance. Furthermore, by employing a two-stage multinomial logistic model, we provide insights into factors affecting companies’ decisions on incentive provision, as well as showing that the impact of monetary incentives on carbon emissions remains significant even when we control for potential selection bias in our sample. Robert G. Eccles is a Professor of Management Practice at Harvard Business School. Ioannis Ioannou is an Assistant Professor of Strategy and Entrepreneurship at London Business School. Shelley Xin Li is a doctoral candidate at Harvard Business School. George Serafeim is an Assistant Professor of Business Administration at Harvard Business School. We are grateful to the Carbon Disclosure Project and in particular to Maia Kutner for giving access to the investor survey data. We thank Andrew Knauer for excellent research assistance. All errors are solely our own responsibility. Contact author: George Serafeim gserafeim@hbs.edu.