Resumo

Environmental innovation refers to processes, practices, or systems that benefit the environment (Rennings, 2000). In other words, this innovation acts to prevent or reduce environmental damage (Kemp & Pontoglio, 2011), i.e., innovation with an environmental objective (van den Bergh et al., 2011). This type of innovation differs from conventional innovation because it requires skills outside organizational boundaries (Truong & Berrone, 2022) and emphasizes environmental advances rather than focusing only on profit-making activities (Pan et al., 2021).

This paper aims to explore the effect of compensation structure on environmental innovation. Theoretically, the study uses agency theory.

An agency relationship refers to a contract in which one or more individuals hire another to perform a service on their behalf (Jensen & Meckling, 1976). In this line, one party (principal) delegates work to another (agent) (Eisenhardt, 1989), i.e., owners or directors delegate power to agents to make decisions on their behalf (Kayani & Gan, 2022). These agents tend to behave opportunistically due to the conflict of interest with the principal (Nguyen & Soobaroyen, 2022), which can lead to moral hazards or incentive problems (Holmström, 1979).

The final sample contains 450 firm-year observations from 113 firms from 2016-2020. Thus, we employ the Panel-Corrected Standard Error (PCSE) estimation method. This technique assumes that the disturbances are, by default, heteroskedastic and correlated across the panel (Ismail et al., 2022). Therefore, PCSE is useful in estimating linear models in which disturbances are assumed to be both heteroscedastic and correlated across panels (Nyeadi et al., 2018).

Our results suggest that long-term compensation positively influences environmental innovation. According to agency theory, the interests of executives and shareholders align when executives receive a share of the firm (Wang et al., 2021).Furthermore, the results suggest that fixed and short-term compensation does not influence, environmental innovation.

In sum, short-term compensation consists of salary and bonus, and long-term compensation consists of stock compensation (Rekker et al., 2014). Since fixed remuneration (salary) and short-term remuneration (bonus) do not influence environmental innovation and stock compensation positively influences environmental innovation. The results demonstrate that environmental innovation is a long-term process.

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