How do shareholders make sense of the evolving nature of CEO compensation? While CEO pay is traditionally tied to financial performance, CEOs are increasingly receiving compensation based on Environmental, Social and Governance (ESG) performance. We theorize that firms with CEO ESG incentives send an equivocal signal to shareholders, which is a signal that can be interpreted in multiple ways. Triggered by this equivocality, we expect that shareholders will make sense of the signal by relying on governance cues. We propose two governance cues that will shape shareholders’ perceptions of accountability (i.e., ESG transparency and ESG committee) and two governance cues that shape perceptions of board vigilance (i.e., board independence and CEO duality). We find that shareholders’ interpretations of CEO ESG incentives depend on a firm’s ESG transparency and board independence. Specifically, we found a positive relationship between CEO ESG incentives and say-on-pay voting for firms with high ESG transparency and high board independence. Our research makes several contributions to the literature on signaling theory, sensemaking, agency theory and say-on-pay.
