Assessing ESG Metric Designs: Implications for ESG Outcomes and CEO Compensation
Prof. Jongwon PARK
Assistant Professor, School of Accounting and Finance, Hong Kong Polytechnic University
Date: 3 December 2024 (Tuesday)
Time: 10:30 – 12:00
Venue: E22-2010
Host: Prof. Duncan Jiancheng LIU, Assistant Professor in Accounting
Abstract
We examine the association between the design of environmental, social, and governance (ESG) metrics, ESG outcomes, and CEO compensation. Using hand-collected data on ESG metrics from the annual bonus contracts of CEOs in S&P 500 firms, we find that managerial incentives, board oversight, peer influence, and shareholder pressures are key factors shaping a firm’s choice of ESG metrics with quantified targets or exclusive ESG focus. In terms of outcomes, we find that ESG metrics with quantified targets or exclusive ESG focus are linked to higher ESG ratings and increased implementation of environmentally friendly policies. Conversely, ESG metrics without such design features are not significantly linked to improved ESG outcomes or increased use of environmental policies but are correlated with higher CEO bonuses. Additionally, firms that use non-quantified or non-exclusive ESG metrics provide more favorable evaluations of ESG achievement levels for bonus payouts. This discrepancy between internal assessments and both external ESG ratings and actual firm policies suggests a potential misalignment in how boards evaluate ESG performance. Our study provides valuable insights into designing ESG metrics that align with stakeholder interests and inform executive compensation strategies, emphasizing the need for sound governance practices.
Speaker
Prof. Jongwon Park is an Assistant Professor at the School of Accounting and Finance. Before joining PolyU, Jongwon was at Monash University, Australia. His research interests cover executive compensation structure, compensation performance metrics, corporate governance, auditing, and the value-relevance of accounting information. His research has been published on top accounting journals, such as The Accounting Review (2 papers), AJPT, JAAF, JCF, JBE, among others.
All are welcome!
