ESG-based remuneration in the wave of sustainability

Abstract

By investigating ESG-based remuneration in the UK FTSE 350 companies, this article finds that in practice, ESG-based remuneration may depart from its expected role in promoting corporate sustainability, whereas being adopted as a tactic for impression management or managerial rent extraction. Due to the unmeasurable effects of most ESG factors on shareholder value and their subjective nature, ESG-based remuneration is vulnerable to exploitation for symbolic and self-serving purposes. For companies aiming to promote long-term shareholder value, extending the assessment period of financial performance is a less costly and risky option compared to ESG-based remuneration. Differently, for companies oriented by a stakeholder purpose, ESG-based remuneration may play a part in incentivising executives to achieve plural stakeholder interests. To mitigate the risk of exploitation, this article proposes rule tightening in the current disclosure and monitoring frameworks for executive remuneration.