Difficulty of Sustainability Performance Targets in CEO Bonus Plans

Abstract

Drawing on insights from goal-setting theory, we assert that performance targets are highly likely to be reached when they are set lower than prior performance. We hand-collect data on sustainability performance targets in S&P 500 CEO bonus plans. We find that these targets are set lower than prior performance, demonstrating that sustainability targets are not difficult for CEOs to achieve. We also compare the difficulty of sustainability performance targets in CEO bonus plans with that of financial performance targets, showing that sustainability targets are significantly less demanding. Furthermore, we observe that almost two-thirds of sustainability performance targets are realized at the end of the year, which creates a favorable impression of sustainability performance. By setting easy CEO sustainability performance targets, we contend that boards do not motivate high effort on sustainability performance. The implications of our findings are threefold: (1) boards should set more challenging sustainability performance targets in CEO pay to effectively govern corporate sustainability performance; (2) firm stakeholders should actively engage with boards to ensure CEO compensation appropriately incentivizes high performance on sustainability matters; (3) ESG (environmental, social, governance) investors should be cautious if comparing ex post realized sustainability performance to ex ante targets, as the information may be misleading.