I am once again borrowing from Meredith, but this time from the Compensation Standards blog. She writes about a study on the effectiveness of ESG metrics in executive compensation. Turns out they are very effective … for executives.
“In ‘ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans,’ Adam Badawi (UC Berkeley) and Robert Bartlett (Stanford Law School) audited S&P 500 companies’ 2023 proxy statements to assess the use of ESG metrics and, most importantly, [executives’] performance against those metrics. Here’s what they found (from their HLS blog summary):
Financial targets are nearly always hard targets that are tied to measures such as revenue and profitability. In general, they appear to be set at levels that are not easy to hit, which would explain why executives missed all of their financial targets 22% of the time in our sample.
ESG targets, it appears, get set in a different way. We find that, of the 247 firms that disclose an ESG performance incentive, only 6 of them reported missing every target. That is, 98 percent of them met at least one ESG target. Similarly, we find that 44% of firms met or exceeded all of their financial targets while 76% of firms met or exceeded all of their ESG targets.
They then tried to analyze what’s causing this. Are executives just ‘knocking it out of the park’ when it comes to ESG improvement? It’s hard to say for sure, but that seems unlikely… [ESG goals] ‘may be set at levels that are low to allow executives to reap their rewards even if ESG performance is not particularly strong.'”
Meredith showed me a few of these targets as laid out in proxy statements. They are typically programmatic (e.g., formally establishing internal programs or future environmental goals) rather than “technical” reflecting specific operating/environmental metrics for the fiscal year (e.g., 10% reduction in Scope 1 GHG emissions or water use reduction of 20%). Certainly there are companies who do set stretch ESG goals for themselves, but those are not the norm in my experience.
Over on LinkedIn, our friend Nawar Alsaadi also looked at the study and pointed out that
“when ESG targets are tied to obligatory reporting obligations such as those required by the EPA, OSHA or EEO-1, they are missed at a much higher rate.”
Missing goals based on regulatory mandates is not surprising because external factors impact a company’s ability to meet compliance and executives underestimate difficulties in maintaining compliance.
Tying executive compensation was once considered a meaningful way of pushing corporate ESG/sustainability performance ahead. Sadly, it is for the most part only another system to game.
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