Regulatory and investor demands to use ESG performance metrics in executive compensation: right instrument, wrong method

Dell-Erba, Marco and Gomtsyan, Suren ORCID: 0000-0002-7531-6187 (2024) Regulatory and investor demands to use ESG performance metrics in executive compensation: right instrument, wrong method. Journal of Corporate Law Studies, 24. 1 - 40. ISSN 1473-5970

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Abstract

The growing acknowledgment of the need to transition to sustainability in corporate governance has led to the scrutiny of and the infusion of non-financial environmental, social, and governance (ESG) goals into the traditional incentive-based executive remuneration frameworks. The swift adoption of ESG metrics in executive compensation by global corporations and their endorsement by influential institutional investors and various regulatory bodies highlight this trend. This article challenges the effectiveness and necessity of universally applying standard ESG metrics in compensation structures and aims to construct a framework for a more contextual and nuanced application of ESG-linked executive compensation. The analysis highlights the limitations of ESG objectives unrelated to shareholder value and demonstrates the limited circumstances where some company specific ESG objectives can drive rapid changes in targeted performance by drawing attention to these objectives. These findings question the evolving practice of a uniform integration of ESG metrics in compensation plan design of all companies and urge regulators, institutional investors, and corporate boards to adopt a more tailored, focused, and selective strategy in integrating ESG metrics into executive pay.

Item Type:	Article
Official URL:	https://www.tandfonline.com/journals/rcls20
Additional Information:	© 2024 The Authors
Divisions:	Law
Subjects:	K Law
Date Deposited:	03 May 2024 11:06
Last Modified:	18 Nov 2024 17:24
URI:	http://eprints.lse.ac.uk/id/eprint/122893

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