Tying some amount of executive compensation to a company’s ESG performance has become more common among U.S. public companies over the last generation, Adam B. Badawi and Robert Bartlett write in a new paper.

But ESG-related pay remains a very modest part of total CEO pay and is awarded with unusually high frequency, find Badawi, a professor at UC Berkeley School of Law, and Bartlett, a professor at Stanford Law School, in their article “ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans,” available on www.ssrn.com.

The authors write that only 12% of S&P 500 companies had compensation plans with a component tied to corporate social responsibility in 2004, a figure that had risen to 37% by 2013 and to 63% by 2023, the year where the authors surveyed the prevalence and structure of ESG performance in executive compensation plans. They found that the vast majority of companies include ESG incentives in their annual, rather long-term incentive plans.

Because annual plans generally comprise “a much smaller component of annual compensation than” long-term plans and because the ESG component in an annual plan averages only 15%, the impact of ESG performance on “a CEO’s expected annual compensation is typically 3% or less,” the authors find.

Executives of the companies surveyed missed all of their financial targets 22% of the time and met all of those targets 44% of the time, the authors found. But only 6 of 247 firms that disclosed an ESG performance incentive reported that they missed all of their ESG targets, the authors wrote, while 188 of the companies, or 76%, reported meeting or exceeding all of their ESG targets. The authors argue that this more likely reflects “weak governance” rather than “exceptional performance” on ESG factors.

In response, Badawi and Bartlett conclude, “It may be advisable for interested investors and regulators to suggest, or even demand, more regularized disclosure of information about the setting and assessment of performance incentives for ESG-based pay.”