Government compensation tied to ESG efficiency


Environmental, social, and governance metrics are receiving growing consideration as a measure of company efficiency. This column makes use of cross-sectional knowledge to evaluate the prevalence and impression of together with such metrics in government compensation schemes. Utilization of ‘ESG pay’ has grown quickly previously decade, with over 30% of companies together with ESG metrics of their key efficiency indicators in 2021. It’s extra widespread in nations perceived to be delicate to ESG considerations. Companies adopting ESG pay do obtain extra beneficial ESG scores from ranking companies, however the impression on shareholder wealth is ambiguous. 

With the rising curiosity in ‘company social duty’ ideas, a broad set of ‘environmental, social, and governance’ (ESG) variables have been proposed as metrics to gauge company social duty efforts. Latest survey proof means that the proportion of worldwide companies that embrace ESG metrics of their government compensation has grown quickly (Gosling et al. 2021).

In a latest paper (Cohen et al. 2022), we performed a global research of the observe of together with ESG metrics in government compensation schemes (henceforth referred to easily as ‘ESG pay’). Primarily based on knowledge from a large cross-section of companies all over the world, we doc a number of empirical patterns. 

The primary hanging discovering is the latest development charge of ESG pay. As proven in Determine 1, the share of companies indicating that some ESG metrics are key efficiency indicators (KPIs) for his or her executives has grown from 3% in 2010 to over 30% in 2021. In different phrases, Determine 1 highlights that the widespread use of ESG pay is a latest phenomenon.

Determine 1 Use of ESG metrics in government compensation

Our empirical evaluation is targeted on two broad points associated to the observe of ‘ESG pay’: Who’re the adopters of ESG pay and what financial outcomes are related to the inclusion of ESG metrics in government compensation schemes? And extra particularly, what traits, corresponding to geographic location, measurement, business, and possession construction, are likely to make companies extra vulnerable to undertake the observe of ESG pay?

From an company and stewardship perspective, one would anticipate reliance on ESG metrics in government compensation packages, offered a agency’s house owners and the board of administrators appearing on their behalf intrinsically care about ESG outcomes. Some institutional fairness buyers (e.g. BlackRock) have urged companies to articulate their responses to the approaching monetary dangers ensuing from local weather change (Azar et al. 2021). Particularly, carbon emissions are seen as indicators of future monetary dangers. Reliance on ESG pay would then be consistent with earlier agency-theoretic findings demonstrating the worth of together with operational metrics, corresponding to product high quality or buyer satisfaction, in managerial incentive contracts (Sliwka 2002, Dutta and Reichelstein 2003). This prediction emerges even when the agency’s share worth, a key indicator of future efficiency, is obtainable for contracting functions. 

One other rationale for together with ESG metrics in government compensation schemes is that these metrics incessantly pertain to exterior prices that aren’t correctly accounted for in a market financial system. Carbon emissions and local weather change are prime examples on this context. Homeowners can then credibly convey to the agency’s stakeholders that administration’s consideration can be drawn to those exterior results. Along with enhancing the final company picture, a agency’s dedication to be ‘ESG aware’ could strengthen buyer loyalty and make the agency’s fairness shares extra engaging for sure investor teams.

Nonetheless, ESG pay may be adopted as mere ‘window-dressing’ or an try at ‘green-washing’ (Grewal and Serafeim 2021). Within the context of ESG pay, window-dressing could also be tempting for companies whose house owners are sceptical relating to the monetary advantages rising from larger ESG scores, apart from the final profit that outcomes from enhancing the agency’s company picture and its standing with sure stakeholder teams. Ideally, these companies want to be perceived as being ‘ESG accountable’ with out having to ‘stroll the speak’. Window-dressing is arguably tough to detect within the context of ESG pay as a result of the measurement of those variables is incessantly subjective on the agency degree. Moreover, outdoors observers typically don’t have entry to the relative weights given to completely different efficiency indicators, the usage of targets and thresholds, in addition to the precise type of the manager payout perform.

Our evaluation reveals that a number of exterior elements seem to make companies extra vulnerable to undertake ESG pay. At a macro degree, the inclusion of ESG metrics in compensation contracts is extra widespread in nations which can be typically perceived to be ‘ESG delicate’, for instance as a result of some type of ESG reporting is already obligatory. As one may anticipate, companies working in environmentally burdensome industries even have the next proclivity to undertake ESG pay. On the agency degree, we discover that, apart from measurement and volatility, the observe of ESG pay is related to companies which have publicly issued environmental commitments and people the place institutional shareholders have a comparatively massive possession share.

By way of subsequent outcomes noticed for the adopters of ESG pay, we discover that these companies obtain, on common, extra beneficial ESG scores from outdoors ranking companies. ESG pay adopters additionally are likely to expertise enhancements for one key environmental ESG metric: the agency’s carbon dioxide emissions. These patterns are extra pronounced in ESG delicate nations, particularly nations throughout the EU. 

Relating to government compensation penalties, our outcomes point out that, after controlling for accounting and inventory worth efficiency, executives of companies exhibiting larger ESG rankings and decrease CO2 emissions obtain larger variable compensation. This discovering doesn’t emerge for companies that don’t undertake ESG pay. 

The impact of ESG pay on shareholder wealth is much less clear-cut. We discover no constructive affiliation with monetary outcomes, corresponding to return on property, and even discover a lower in inventory returns after the adoption of ESG pay.

Taken collectively, our findings on the determinants of and outcomes related to ESG pay are according to the speculation that ESG pay provisions complement conventional monetary metrics in government compensation packages in a substantive method. The outcomes additionally counsel that funding teams insistent on consideration to ESG standards are certainly keen to simply accept decrease monetary returns for enhancements in ESG dimensions. Amongst different issues, our proof has implications for the continued debates across the present efforts to transition in the direction of a greener financial system (e.g. Bolton et al. 2021) and the position of establishments within the financial system (e.g. Azar and Vives 2022).


Azar, J, M Duro, I Kadach and G Ormazabal (2021), “The Massive Three and Company Carbon Emissions across the World”, Journal of Monetary Economics 142: 674-696.

Azar, J and X Vives (2022), “Revisiting the anticompetitive results of widespread possession”,, 15 June.

Bolton, P, S Reichelstein, M Kacperczyk, C Leuz, G Ormazabal and D Schoenmaker (2021), “Obligatory carbon disclosures and the trail to web zero”,, 4 October.

Cohen, S, I Kadach, G Ormazabal and S Reichelstein (2022), “Government Compensation Tied to ESG Efficiency: Worldwide Proof”, CEPR Dialogue Paper No. 17267. 

Dutta, S and S Reichelstein (2003), “Main indicator variables, efficiency measurement, and longterm versus short-term contracts”, Journal of Accounting Analysis 41: 837-866.

Gosling, T, L Harris, C Hayes Guymer, P O’Connor and A Savage (2021), “Paying Nicely by Paying for Good”, PwC and London Enterprise Faculty.

Grewal, J and G Serafeim (2021), “Analysis on Company Sustainability”, Foundations and Traits in Accounting.

Sliwka, D (2002), “On the usage of nonfinancial efficiency measures in administration compensation”, Journal of Economics and Administration Technique 487-511.



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