Beyond ESG: Executive Pay Metrics and Shareholder Support

We document that executive compensation contracts with ESG metrics are more likely to feature
other financial and non-financial metrics and a higher proportion of equity-based compensation
than contracts without ESG metrics. Companies introduce ESG metrics in areas where they have
experienced good performance; however, these metrics have limited impact on actual executive
payouts or the sensitivity of pay to market, earnings, and ESG performance. Similar to metrics
linked to operating performance, ESG metrics are most prevalent in companies with recently
appointed CEOs, new active blockholders, and those that have experienced dissent in say-on-pay
votes. All metrics increase shareholders’ support in say-on-pay votes, reduce dissent on
management proposals, and decrease the number of shareholder proposals, and ESG proposals in
particular. Overall, the evidence suggests that ESG metrics, like all other metrics, aim to build
shareholder consensus on executive compensation and corporate strategy.