Accounting Academic Area Workshop Series: Clara Chen
Clara Chen
Lillian and Morrie Moss Distinguished Professor in Accountancy
University of Illinois Urbana Champaign
Consequences of Meeting or Missing ESG Targets in CEO Compensation Contracts
Date: Monday, April 28, 2025
Time: 10:30 AM – 12:00 PM
Location: Bronfman building, Room 245
Abstract
Despite an increasing trend of firms tying CEO compensation to environmental, social and governance (ESG) targets, there is a lack of empirical evidence on the consequences of meeting or missing such targets. Using hand-collected data on ESG targets and their achievement disclosed in U.S. public firms’ proxy statements between 2006 and 2020, we examine the consequences of meeting or missing ESG targets in CEO compensation contracts. First, we provide large-sample descriptive evidence of the frequency, type, and achievement ratio of ESG targets in CEO compensation contracts. We document an increasing use of ESG targets in CEO compensation contracts. We also document that, on average, firms achieve 66% of numerical ESG targets and 80% of non-numerical ESG targets in CEO compensation contracts. Second, we document that ESG targets in CEO compensation plans have meaningful incentive effects such that ESG target achievement is positively associated with CEO cash compensation. Third, we find that socially-responsible investors are more likely to invest in firms that meet or beat their ESG targets; however, a higher likelihood of meeting ESG targets is actually associated with worse ESG outcomes (captured by OSHA incidents and air emissions). These results suggest that, instead of using challenging ESG targets to motivate high ESG performance, firms may use ESG target achievement to attract ESG-focused investors. Hence, ESG-focused investors need to view ex post ESG target achievement with caution.
