Vladimir Atanasov
Vladimir Atanasov

Drawing the Line between Bond Dealer and Bandit

Drawing the Line between Bond Dealer and Bandit

27/08/2025

Financial markets;Market microstructure

15:00

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15:30

We model the multitasking nature of managerial incentives when ESG metrics areintroduced jointly with standard financial or accounting metrics in executivecompensation. Building on insights from multitasking theory, we predict thatpay-performance sensitivity or dollar delta of standard metrics should optimallydecrease when value-adding but less measurable ESG goals are introduced in executivepay. Empirical tests support the existence of a significant opportunity cost for theeffort of executives to improve ESG metrics that firms mitigate by decreasingincentives to achieve standard metrics. Consistently, the downward adjustment indollar delta of standard metrics is shown to be larger when the number of ESG metricsincreases, they are less material to the firm, or less measurable. This adjustment is notoffset by a simultaneous increase in the time vesting delta or the executive’s totalcompensation. The tests show differential effect of E, S, and G metrics on the dollardelta of standard metrics. In sharp contrast, there is no variation in the dollar delta ofstandard metrics when a new standard metric (instead of an ESG metric) isintroduced. Overall, the evidence is consistent with efficient contracting in thepresence of multitasking when ESG metrics are introduced in executive compensation.

We model the multitasking nature of managerial incentives when ESG metrics areintroduced jointly with standard financial or accounting metrics in executivecompensation. Building on insights from multitasking theory, we predict thatpay-performance sensitivity or dollar delta of standard metrics should optimallydecrease when value-adding but less measurable ESG goals are introduced in executivepay. Empirical tests support the existence of a significant opportunity cost for theeffort of executives to improve ESG metrics that firms mitigate by decreasingincentives to achieve standard metrics. Consistently, the downward adjustment indollar delta of standard metrics is shown to be larger when the number of ESG metricsincreases, they are less material to the firm, or less measurable. This adjustment is notoffset by a simultaneous increase in the time vesting delta or the executive’s totalcompensation. The tests show differential effect of E, S, and G metrics on the dollardelta of standard metrics. In sharp contrast, there is no variation in the dollar delta ofstandard metrics when a new standard metric (instead of an ESG metric) isintroduced. Overall, the evidence is consistent with efficient contracting in thepresence of multitasking when ESG metrics are introduced in executive compensation.

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