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ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans.

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Authors: Badawi, Adam B.1, Bartlett, Robert2
Source: Business Lawyer. Summer2025, Vol. 80 Issue 3, p789-830. 42p. 3 Black and White Photographs, 4 Charts, 6 Graphs.
Subject Terms: *Executive compensation, *Corporate governance, *Corporations, *Corporate sustainability, *Profitability, Incentive (Psychology)
Geographic Terms: United States
Abstract: The practice of linking executive compensation to ESG performance has recently become more prevalent in U.S. public companies. In this article, we document the extent of this practice within S&P 500 firms during the 2023 proxy season and, using a combination of hand coding and GPT-auditing, we extract the unstructured information that details how often executives miss, meet, or exceed the financial and ESG-based targets in their compensation plans. We find that 316 of these firms (63.2 percent) include an ESG component in their executives’ compensation and that the vast majority of these incentives are part of the annual incentive plan (AIA) rather than a part of the more substantial longterm incentive plan (LTIP). While executives miss all of their financial targets 22 percent of the time in our sample, we show that this outcome is exceptionally rare for ESG-based compensation. Only 6 of 247 (2 percent) firms that disclose an ESG performance incentive report missing all of the ESG targets. We ask whether the ESG overperformance that we observe is associated with exceptional ESG outcomes or, instead, is related to governance deficiencies. We find that meeting or exceeding all ESG-based targets is not associated with improvements in ESG scores, but it is associated with more opposition in say-on-pay votes, providing support for the weak governance theory over the exceptional performance theory. [ABSTRACT FROM AUTHOR]
Database: Entrepreneurial Studies Source
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PubType: Academic Journal
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  Data: <searchLink fieldCode="JN" term="%22Business+Lawyer%22">Business Lawyer</searchLink>. Summer2025, Vol. 80 Issue 3, p789-830. 42p. 3 Black and White Photographs, 4 Charts, 6 Graphs.
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  Data: *<searchLink fieldCode="DE" term="%22Executive+compensation%22">Executive compensation</searchLink><br />*<searchLink fieldCode="DE" term="%22Corporate+governance%22">Corporate governance</searchLink><br />*<searchLink fieldCode="DE" term="%22Corporations%22">Corporations</searchLink><br />*<searchLink fieldCode="DE" term="%22Corporate+sustainability%22">Corporate sustainability</searchLink><br />*<searchLink fieldCode="DE" term="%22Profitability%22">Profitability</searchLink><br /><searchLink fieldCode="DE" term="%22Incentive+%28Psychology%29%22">Incentive (Psychology)</searchLink>
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  Label: Abstract
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  Data: The practice of linking executive compensation to ESG performance has recently become more prevalent in U.S. public companies. In this article, we document the extent of this practice within S&P 500 firms during the 2023 proxy season and, using a combination of hand coding and GPT-auditing, we extract the unstructured information that details how often executives miss, meet, or exceed the financial and ESG-based targets in their compensation plans. We find that 316 of these firms (63.2 percent) include an ESG component in their executives’ compensation and that the vast majority of these incentives are part of the annual incentive plan (AIA) rather than a part of the more substantial longterm incentive plan (LTIP). While executives miss all of their financial targets 22 percent of the time in our sample, we show that this outcome is exceptionally rare for ESG-based compensation. Only 6 of 247 (2 percent) firms that disclose an ESG performance incentive report missing all of the ESG targets. We ask whether the ESG overperformance that we observe is associated with exceptional ESG outcomes or, instead, is related to governance deficiencies. We find that meeting or exceeding all ESG-based targets is not associated with improvements in ESG scores, but it is associated with more opposition in say-on-pay votes, providing support for the weak governance theory over the exceptional performance theory. [ABSTRACT FROM AUTHOR]
PLink https://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=ent&AN=188034416
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      – Code: eng
        Text: English
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        PageCount: 42
        StartPage: 789
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      – SubjectFull: Executive compensation
        Type: general
      – SubjectFull: Corporate governance
        Type: general
      – SubjectFull: Corporations
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      – SubjectFull: Corporate sustainability
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      – SubjectFull: Profitability
        Type: general
      – SubjectFull: Incentive (Psychology)
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      – SubjectFull: United States
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      – TitleFull: ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans.
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              M: 06
              Text: Summer2025
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              Y: 2025
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