{"id":15533,"date":"2023-05-30T04:46:41","date_gmt":"2023-05-30T08:46:41","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/ceos-are-earning-big-bucks-for-hitting-esg-goals-is-it-just-another-pay-raise\/"},"modified":"2023-05-30T04:46:43","modified_gmt":"2023-05-30T08:46:43","slug":"ceos-are-earning-big-bucks-for-hitting-esg-goals-is-it-just-another-pay-raise","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=15533","title":{"rendered":"CEOs Are Earning Big Bucks for Hitting ESG Goals. Is It Just Another Pay Raise?"},"content":{"rendered":"
\n

Brian Niccol earned $17.2 million as CEO of
\n Chipotle Mexican Grill
\n last year, but some of his pay had nothing to do with burrito sales. <\/p>\n

Niccol earned a $2.1 million bonus partly because Chipotle (ticker: CMG) met some of its goals in environmental, social, and governance (ESG) areas, including sourcing local produce and advancing a diverse workforce. A spokesperson for Chipotle said the compensation plan \u201csets the right example\u201d for the company\u2019s more than 100,000 employees.<\/p>\n

\n

Chipotle isn\u2019t alone in tying pay to ESG targets. Over 60% of
\n S&P 500
\n companies included ESG measures in executive pay last year, up from 19% in 2019, according to proxy advisory firm Glass Lewis. Utilities and fossil fuel companies\u2014facing some of the steepest risks to revenue as the world moves to cleaner energy\u2014are most likely to include ESG factors in pay, followed by consumer-facing brands and financial institutions.<\/p>\n

What\u2019s unclear is the impact of ESG-related bonuses. Proponents say that aligning CEO compensation more closely to ESG targets will incentivize companies to take action in areas like workforce diversity or cutting emissions. Critics worry that ESG bonus criteria are often vague or too easy to hit\u2014providing another way to increase executive compensation without having much impact on the bottom line, people, or the planet.<\/p>\n

\u201cCompanies are using it to send a signal to investors and others that certain ESG issues matter to the management,\u201d says Paul Washington, executive director of the Conference Board\u2019s ESG Center. \u201cI think they are serious about this, but my main concern is that it may not be effective.\u201d<\/p>\n

Many ESG targets in compensation plans are ambiguous and subjective. For example, companies might set \u201ccutting carbon emissions\u201d as a goal without specifying the percentage of cuts or whether they include \u201cScope-3\u201d emissions, which are comprehensive measures covering a product\u2019s environmental toll across its life cycle, from production to consumption.\u00a0<\/p>\n

According to proxy advisory firm ISS, only 13% of S&P 500 companies have specific ESG objectives in compensation plans, and just 7% also disclose information on the weighting criteria. \u201cThe majority of companies are being pretty vague about it,\u201d says Joe Arns, executive director of ISS\u2019s ESG rating branch.\u00a0<\/p>\n

Even when ESG targets are specific, there often isn\u2019t enough context about their real-world impact, according to Harvard Law School professor Lucian Bebchuk. Such compensation components could be used by CEOs to inflate pay \u201cwith little or no accountability for actual performance,\u201d he wrote in a 2022 paper.<\/p>\n

Investors seem to agree the criteria should be toughened. According to ISS\u2019s 2021 Global Benchmark Policy Survey, more than 50% of investors believe ESG goals should be used in executive pay only when they are \u201cspecific and measurable.\u201d\u00a0<\/p>\n

Companies sometimes set ESG bonus targets for \u201cdealing with low-hanging fruit,\u201d says Rosanna Landis Weaver, a program manager at shareholder advocacy group As You Sow, which pushes for stricter criteria.\u00a0<\/p>\n

Take
\n Dominion Energy
\n (D), an electric utility. As part of its executive incentive plan in 2021, the company set a goal for 95% of employees to participate in a town hall about sustainability initiatives. That didn\u2019t impress Weaver. \u201cEverybody should be having these town halls, this isn\u2019t what we should be paying extra for,\u201d she says.<\/p>\n

Dominion CEO Robert Blue received nearly $7 million in compensation in 2021, including a $1.75 million bonus partially thanks to meeting ESG goals. The company was rated above-average among peers by MSCI\u2019s ESG ratings unit, partly due to its effort in water management. Dominion didn\u2019t respond to a request for comment.\u00a0<\/p>\n

According to a recent report from consulting firm PwC, executives at Europe\u2019s 50 largest companies received 86% of the maximum payouts for meeting carbon-emission targets last year, higher than the average payout rate of 75% for other performance measures. \u201cHave these companies really done so well on climate?\u201d the PwC authors ask. \u201cThis seems difficult to square with the consensus that overall progress on climate change is insufficient.\u201d<\/p>\n

Another concern: Companies are inclined to use \u201coff the shelf\u201d ESG metrics like board diversity and carbon emissions, even though they might not be material for their core business, according to the Conference Board\u2019s Washington. He expects to see more company-specific ESG targets in compensation plans as firms assess the impact of hitting the goals on their business.\u00a0<\/p>\n

Linking ESG work to annual CEO bonuses could also lead to shortsighted decisions that aren\u2019t the best approach in the long run. \u201cIf companies change to more efficient lightbulbs, they can get quick reductions in energy bills, but some of the other work requires planning and time, and it might not pay off in a day or two,\u201d says Melissa Walton, a research associate at As You Sow. <\/p>\n

Institutional investors generally favor adding ESG criteria to bonuses, says ISS\u2019s Arns. \u201cAt this stage, simply having it in an incentive plan is a big step forward,\u201d he says. <\/p>\n

Whether it\u2019s getting CEOs to push further into ESG, or simply giving them a pay bump for doing so anyway, has yet to be determined. <\/p>\n

Write to Evie Liu at evie.liu@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Brian Niccol earned $17.2 million as CEO of Chipotle Mexican Grill last year, but some of his pay had nothing to do with burrito sales. Niccol earned a $2.1 million bonus partly because Chipotle (ticker: CMG) met some of its goals in environmental, social, and governance (ESG) areas, including sourcing local produce and advancing a […]<\/p>\n","protected":false},"author":1,"featured_media":15534,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-15533","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\nCEOs Are Earning Big Bucks for Hitting ESG Goals. 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