Should we link executive pay to ESG measures?

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Here’s the intro from this blog from Cooley’s Cydney Posner:

According to this report by The Conference Board, in collaboration with Semler Brossy and ESGAUGE, the vast majority (73% in 2021) of companies in the S&P 500 are “now tying executive compensation to some form of ESG performance.” To be sure, some companies have long tied executive comp to particular ESG measures, such as diversity, customer satisfaction, employee and product safety and anticorruption programs. That has now expanded to a wider use of various ESG metrics, which the report attributes to a new intensified focus on ESG “driven by investors, employees, consumers, business partners, ESG rating agencies, and regulators,” together with “the shift to a multi-stakeholder form of capitalism.”

The expanded use of ESG measures in executive compensation offers the obvious benefit of incentivizing and rewarding behaviors needed to achieve goals that so many stakeholders view as critical. At the same time, however, inclusion creates a number of risks and challenges. Not all large institutional holders, the report observes, view ESG comp measures favorably, and some are perhaps a bit skeptical—is the company just virtue signaling? Are the targets sufficiently rigorous to avoid simply “guaranteeing” bonuses for executives? Do ESG-based pay plans provide investors with “sufficient transparency and specificity”? Is performance against the targets measurable? Can ESG “actually drive financial performance for companies and investors alike”?