All Hat and No Cattle? ESG Incentives in Executive Compensation

Is linking executive pay to ESG targets just greenwashing?

Matthias Efing, Stefanie Ehmann, Patrick Kampkötter, and Raphael Moritz investigate whether tying top managers’ pay to ESG goals amounts to more than symbolic compliance in their article « All Hat and No Cattle? ESG Incentives in Executive Compensation ».

They use detailed panel data on European executives from 2013 to 2020 to analyze how sustainability targets are integrated into bonus and equity incentive plans.

They show:

• By 2020, about 60% of executives had an ESG-linked component in their pay, but on average these goals accounted for only ~5% of the total performance evaluation (up from ~2% in 2013).
• The majority of sustainability goals in pay plans are effectively cosmetic: many lack firm, binding targets or predetermined weights, allowing boards to award them almost by default.
• Sustainability-linked bonuses are applied more often to high-profile executives (CEOs, CFOs, COOs) than to specialised roles, but are rarely tailored to specific job responsibilities.
• Financial and large companies often incorporate ESG goals in a discretionary, low-impact manner, raising greenwashing concerns.
• In contrast, heavy-polluting industries are more likely to set binding ESG targets with substantial weight, reflecting a more genuine commitment to sustainability.
• Companies tend to choose ESG targets that overlap with financial performance or internal outcomes rather than broader external impacts, focusing on what also benefits the business.:
• Workforce well-being metrics appear in nearly 45% of executive bonus plans by 2020, whereas explicit human rights or community targets are virtually absent.

This paper claims a company boasting sustainability-linked pay isn’t necessarily driving change: simply adding ESG objectives to bonus plans without real teeth can be viewed as PR moves and backfire.

The low clarity on target weights and performance thresholds prevent stakeholders from distinguishing genuine sustainability incentives from token gestures.

As a limitation, simply counting the number of ESG metrics may overstate their importance. Firms might split one ESG theme into multiple sub-metrics to make the pay plan appear more sustainability-oriented.

Detailed information on long-term incentive plans was limited, as many firms did not disclose exact targets or weights for multi-year plans, which led the analysis to emphasise short-term annual bonus structures.