JMGT_V4_N2_RP2 Padma Kadiyala Gabriella Sierra Journal on Management 2230 – 715X 4 2 37 46 Executive Compensation, Stock Options, Corporate Sustainability This paper studies how executive compensation is designed in firms that adopt sustainable corporate policies ('sustainable firms'). It is now well understood that executive stock options increase the incentive for risk taking, an incentive that is exacerbated by declining stock prices (Kadan and Swivels (2007)). Empirical analysis of compensation policies at sustainable firms requires identification of such firms, a task that is susceptible to an endogeneity bias. The bias arises when profitable firms mirror the characteristics of sustainable firms without intentionally electing to be so. The paper circumvents the bias by comparing and contrasting compensation practices of firm additions and deletions from an index of sustainable firms created by Dow Jones Co, called the Dow Jones Sustainability Index (DJSI). The analysis shows significant differences among additions and deletions in the level and composition of CEO pay. Only 27% of median CEO pay in firms added to the index is in the form of stock options. Among deletions, stock options account for 41% of total CEO pay. Compensation of the top four executives below CEO is more comparable across the two sets of firms. September - November 2009 Copyright © 2009 i-manager publications. All rights reserved. i-manager Publications http://www.imanagerpublications.com/Article.aspx?ArticleId=1055