Mediating effect of ESG performance on executive incentive compensation-financial performance relationship: evidence from MENA banking sector

• Published in: Corporate governance (Bradford) Vol. 24; no. 2; pp. 439 - 461
• Main Authors: Ben Ali, Abdelhakim, Chouaibi, Jamel
• Format: Journal Article
• Language: English
• Published: Bradford Emerald Publishing Limited 16-02-2024; Emerald Group Publishing Limited
• Subjects: Banks; Executive compensation; Hypotheses; Incentives; Social responsibility; Stockholders; Sustainable development; Value creation; Variables; Environmental; Corporate social responsibility; social and governance; Sustainable development goals; Financial performance; Executive incentive compensation
• ISSN: 1472-0701; 1758-6054; 1472-0701
• DOI: 10.1108/CG-02-2023-0065

Purpose
This study aims to investigate whether integrating environmental, social and governance (ESG) practices mediates the relationship between executive incentive compensation and the financial performance of Islamic and conventional banks in the Middle East and North Africa (MENA) region.
Design/methodology/approach
This study used multiple regression models to analyze the effectiveness of ESG practices as a mediating variable in explaining the relationship between executive incentive compensation and banks’ financial performance between 2015 and 2021. The sample consisted of 57 Islamic and conventional banks operating in the MENA region, and the data were collected from the Thomson Reuters database (Data Stream).
Findings
This research paper showed the positive and significant mediating effect of the ESG practice on Banks’ financial performance. Thus, banks’ financial and stock market profitability is influenced by ESG information disclosure. This finding shows that taking ESG into account improves the relationship between executive incentive compensation and banks’ financial performance.
Practical implications
The results may interest academic researchers, regulators and policymakers and would support stakeholders and decision-makers who wish to discover how executive incentive compensation affects financial performance in banks.
Originality/value
This study contributes to previous literature by studying the mediating effect of ESG practices on the relationship between executive incentive compensation and banks’ financial performance. Indeed, the originality of this research paper is justified by the scarcity of studies and, to the best of the authors’ knowledge, constitutes one of the first attempts to examine this relationship via a mediating variable, i.e. ESG.