Blue-chip U.S. companies increasingly rely on environmental, social, and governance (ESG) metrics to determine top executives’ bonuses, raising concerns among investors about manipulation to maximize payouts.
Approximately 3/4 of S&P 500 companies have revealed that environmental, social and governance metrics contributed to executive compensation, a rise from two-thirds in 2021, per data gathered by The Conference Board and Esgauge, an ESG analytics firm. This approach has been adopted by corporations such as American Express, Dow, and Southwest Airlines.
Over half of S&P 500 entities have integrated diversity and inclusion criteria into executive remuneration. Almost half of these businesses included environmental metrics as part of bonuses, a considerable increase from just a quarter in 2020. Trends since 2015 show that traditional pay factors associated with profitability have waned across over 13,000 global companies, while environmental and social-related pay determinants have gained traction.
However, these alternative compensation criteria face skepticism. Ben Colton from State Street Global Advisors remarked, “We are skeptical of ESG metrics being used in compensation. Oftentimes they are very subjective, fluffy and easily gamed.” Southwest Airlines, for instance, increased CEO Robert Jordan’s salary by 76 percent to $5.3 million in a year where they faced criticism for mass flight cancellations. Although Southwest conceded that these cancellations impacted executive bonuses, they also stressed that their performance on ESG initiatives, particularly “DEI and sustainability,” exceeded board expectations.
Strive Asset Management, the Vivek Ramaswamy-led asset firm opposing ESG investing principles, targeted Southwest’s pay plans, sarcastically remarking: “There is no easier way to cut the company’s carbon footprint than to ground thousands of flights.”
Meanwhile, other investment entities, such as UK-based Legal & General Investment Management (LGIM), endorse the inclusion of ESG metrics in pay. However, LGIM’s John Hoeppner noted concerns regarding the ambiguity of some ESG metrics, especially employee engagement. He observed that companies always score above average, suggesting that these metrics can be gamed.
A 2023 research paper by Harvard scholars highlighted the challenges in discerning the validity of ESG pay metrics, questioning whether they genuinely represent meaningful performance or just a means to unjustly boost CEO salaries. Lucian Bebchuk from Harvard Law School emphasized that ESG metrics in pay often result in additional compensation regardless of the equity pay’s effectiveness.
Companies such as American Express allocate a significant proportion of executive bonuses, up to 15 percent, to diversity and cultural achievements. Yet, the precise criteria remain vague. For instance, American Express’s CEO Stephen Squeri received a $10.3 million bonus in 2022, even as overall shareholder return dropped.
Chemical giant Dow has ESG metrics like the “customer experience index” and workforce diversity affecting executive pay. However, the lack of clarity regarding starting benchmarks has been a point of contention. Dow CEO Jim Fitterling’s 2022 bonus was $3.5 million, down from the previous year. Dow maintains that its executive pay structure conforms to market practices, emphasizing the integration of quantifiable ESG metrics in 2020.
CBRE, one of the world’s leading commercial real estate companies, indicated that CEO Robert Sulentic didn’t achieve his financial target that made up half his bonus. However, surpassing strategic goals related to “employee engagement” and diversity resulted in a pay boost. Sulentic’s pay surged by a third to $18.4 million, even though the company witnessed a decrease in total shareholder return.
See full article at the Financial Times.
Jack McPherrin ([email protected]) is a managing editor of StoppingSocialism.com, research editor for The Heartland Institute, and a research fellow for Heartland's Socialism Research Center. He holds an MA in International Affairs from Loyola University-Chicago, and a dual BA in Economics and History from Boston College.