Assessing the Effect of ESG-Linked Pay in the Relationship between Effective Pay-Committee and Firm Performance in Sub-Saharan Africa

Abstract

This study explores a crucial conflict in sustainable corporate governance in emerging markets: whether the performance-enhancing function of efficient compensation committees is aided or hindered by the explicit incorporation of Environmental, Social, and Governance metrics into executive compensation. We use moderated regression models with resilient standard errors using a manually created panel dataset of 100 non-financial enterprises from ten Sub-Saharan African countries between 2016 and 2023. The findings show a recurring conundrum. Higher firm performance (ROA, ROE, Tobin's Q) is correlated with both the adoption of ESG-linked pay and the competence of the compensation committee (measured by size, independence, mandate, Frequency of meetings, and expertise and knowledge), but their combination has a significant negative impact. According to this research, linking CEO Pay to ESG standards can lessen the beneficial monitoring of a watchful committee under sub-Sahara Africa’s unique institutional setting, which is marked by evolving governance regulations and difficulties in ESG measurement. Using the twin perspectives of agency and stakeholder theory, we explain this and propose that inadequately verifiable ESG indicators could lead to expensive short-term goal conflicts or managerial rent-extraction. The study adds to the body of knowledge on global governance by emphasizing how local institutional infrastructures play a crucial role in determining the effectiveness of hybrid (financial-ESG) incentive structures. It emphasizes the necessity of cautious, context-specific, and sequentially applied Pay systems for sub-Saharan Africa practitioners and policymakers as opposed to the broad adoption of international ‘best practices.’

Keywords: ESG-Linked Pay, Effectiveness of Pay-Committee, Firm Performance, Corporate Governance, Sub-Saharan Africa, Sustainability