ESG in Executive Pay: Prevalence, Design, Role Alignment, and Gaps

SYNOPSIS

Using named executive officer (NEO)-level data for Russell 3000 firms from 2021 to 2024, we describe how firms incorporate environmental, social, and governance (ESG) metrics into executive compensation. ESG pay design varies across industries and executive functions in ways broadly consistent with incentive compatibility. However, ESG metrics remain concentrated in short-term incentive plans and are rarely embedded in equity awards. Explicit weights are much more common than modifiers, limiting the extent to which ESG performance affects total pay. In emission-intensive industries, firms quantify goals more often than reported outcomes, creating asymmetry between ex ante expectation and ex post performance. Overall, ESG-linked pay exhibits substantial role alignment, but important design gaps remain. The evidence provides benchmarks for compensation committees designing ESG pay, investors, and stakeholders evaluating pay practices, regulators, and researchers evaluating ESG-linked compensation.

Data Availability: Data are commercially available from the sources cited in the text.

JEL Classifications: M40; M41.