Corporate strategy for the green transition: Are executive incentives effective?

This paper examines whether green incentives embedded in executive compensation schemes are associated with a reorientation of firms' innovative activities toward environmentally sustainable technologies. Drawing on agency theory and the attention-based view of the firm, we conceptualize green incentives as governance and management-control devices that can mitigate managerial short-termism and channel executive attention toward long-horizon environmental objectives, thereby redirecting firms' technological search. Using a panel of publicly listed U.S. and European firms that participate in the Carbon Disclosure Project over the period 2010–2020, we analyse green innovation as a multi-stage process comprising the reorientation of technological search (the distance of firms' patent portfolios from green domains), knowledge recombination (the citation of green prior art in non-green patents), and realized green innovation output (green patent counts and shares). Firms adopting green incentives exhibit higher green innovation output, a significant repositioning of their knowledge portfolios toward green technological domains, and a greater integration of green knowledge into non-green technologies. These associations are weaker among firms experiencing a recent deterioration in carbon performance, and are strongest among continental European firms. Overall, the findings suggest that executive green incentives are associated with the direction, and not merely the volume, of firms' innovative activities, highlighting the role of internal governance mechanisms in sustainability transitions while recognising the limits of causal inference in observational data.