Are Companies Tying CEO Pay To ESG Because It’s Not Linked To Performance?

Are Companies Tying CEO Pay To ESG Because It’s Not Linked To Performance?

April is proxy season. It's a time when financial publications carry a mandatory story about how certain CEOs were paid unreal sums of money in the previous fiscal year. This year is no exception. But the headlines seem to have missed two important trends: (i) the growing pressure to link CEO pay to ESG metrics; and (ii) the initial set of companies that link CEO pay to ESG metrics may have done so to get capital providers to overlook the obvious link between pay and performance. Why? My hypothesis is that adding ESG to CEO pay is a way to check a few boxes and keep the Big Three institutional investors (Vanguard, State Street and Black Rock) happy for a while without getting them to focus too deeply into whether executive pay has actually delivered shareholder value. The case, prima facie, for my hypothesis is pretty strong. The early adopters of the practice feature in prominent market indexes and are hence held passively by the big institutions. Smaller shareholders are by and large powerless to enforce change. Savers mechanically buy ETFs and indexes without worrying too much about what is actually in the index. The only check, if any, on