Links to ESG in executive pay won’t drive corporate strategy

– The idea that we can use ESG targets in pay to force reluctant CEOs to become more focused on ESG is unrealistic. Pay for CEOs has to follow strategy and can’t drive strategy.
– Pay should be aligned with ESG, but that may not mean using ESG targets to set pay.

Here’s a note from Alex Edmans about this article from Alison Taylor and Brian Harward:

There is a seemingly unstoppable trend of linking CEO pay to ESG numbers because we can measure them, even though some of the most important dimensions of ESG are qualitative and can’t be reduced to a simple set of metrics. This is like the proverbial drunk who looks for his keys under the lamppost because that’s where the light is, rather than in the bushes where he’s likely dropped them.

In this note about this PwC report entitled “Paying Well for Paying for Good,” Benjamin Yeoh states:

Tom Gosling suggests companies should not automatically include ESG *targets* in pay. “There are lots of practical difficulties, and scope for unintended consequences” such as distorted incentives and measurement challenges. “There’s a risk that more ESG targets simply results in more pay, due to the difficulty of knowing how stretching these targets are…”

But one nuance stems from this argument: “Pay should be aligned with ESG, but that may not mean ESG targets.” Alignment might not mean targets as argued in the report.

And Tom Gosling notes in another comment:

I think ESG targets can work well where they are used to signal a big change and mobilize an organization or where they are reinforcing a core part of strategy. But this is much more about communicating priorities through the company. This is what our panelists from Unilever and Standard Chartered outlined on our panel event and has also been the motivation at Bp and Shell for example.

The idea that we can use ESG targets in pay to force reluctant CEOs to become more focused on ESG is for the birds in my view. Pay for CEOs has to follow strategy and can’t drive strategy.