A commitment to change? CEO pay and alignment with environmental, social, and governance objectives

Abstract

In the 2019 Business Roundtable “Statement on the Purpose of a Corporation”, over two hundred executives committed to expanding the focus of their respective corporations beyond shareholder primacy. Following advice from agency theory, compensation committees traditionally seek to align executive pay with desired organizational outcomes. Our qualitative study examines whether the signatories made discernible changes to executive compensation structures to align executive incentives with a broader stakeholder view. We observe the compensation committee reports of 135 signatory firms’ proxy statements for the fiscal year ending 2020, to identify whether each firm’s incentive compensation structure included measures aligned with the firm’s commitment to a stakeholder focus. Nearly half of the sample firms continued to reward executives exclusively using measures to assess financial objectives, although thirteen made promises to include stakeholder corporate performance measures in their 2021 compensation programs. Although most leaders say they act in all stakeholder interests, we do not find evidence that these leaders are incentivized to implement the strategic and organizational changes to ensure their firms consider the environmental, social, and sustainable implications of their decisions. Future research should follow these firms’ financial performance to observe strategic consequences to action versus inaction to change.