Environmental, Societal and Governance Metrics and the Outcomes of the Underlying Performative Processes of Chief Executive Officer Pay
Creators: name: Blair, Chris
Publisher: name: Lancaster University
Year: 2024
Subjects: Performativity
CEO pay
ESG

description: My motivation for this research was impassioned by interest in the
 performativity of the underlying processes that drive CEO pay through my
 job of running a consultancy on global governance and executive
 remuneration for the past 24 years. The performativity of CEO pay refers
 to the idea that the level of pay for CEOs, particularly at large publicly
 traded companies, is determined in part by what other CEOs are paid - a
 complex phenomenon that is driven by social norms, competitive pressures,
 and the actions of compensation committees and boards of directors. A
 recent study, published in the Journal of Financial Economics in 2020,
 found that the pay of CEOs at S&amp;P 500 companies is positively
 associated with the pay of CEOs at peer companies, and that this
 relationship is stronger for CEOs with stronger performance. The research
 suggests that this is due to a ‘peer performance’ effect, in which
 directors look to the pay of other CEOs whose companies have similar
 performance when setting pay for their own CEO. To complicate matters,
 wider society has demanded more sustainable and stakeholder-centric
 practices, which has resulted in the introduction of non-financial
 measures in the CEO scorecard.
 
 The rapid emergence and development of non-financial measures covering
 environment, social and governance (ESG) factors has sparked debate on how
 corporate performance should determine the financial reward of Chief
 Executive Officers’ (CEOs) taking these new criteria into account.
 Societal pressure has resulted in underlying structural changes, related
 to ESG performance, in the globe’s largest companies, bringing into sharp
 relief the complex calculative processes (Callon, 1988) used to reward
 past, current, and future CEO financial rewards. These calculative
 processes, however, remain largely empirically under-explored and
 under-theorised. What follows seeks to rectify this imbalance, revealing
 the tendency of remuneration committees to deploy calculative processes to
 perform, shape and format executive reward rather than merely observing it
 (c.f. Callon, 1988: 2). We observe how long-standing debates over the
 adequacy of the conceptual framework, Agency Theory - traditionally used
 to unite the interests of shareholders (principals), CEOs (agents) and
 wider stakeholders - have been reignited by the advent of ESGs and their
 allocation to executive reward. For all the ESG-related rhetoric used by
 globally significant firms, analysis reveals it is shareholder value
 maximisation that statistically drives the allocation of reward, with
 ESG-related factors pushed firmly further down the list of priorities.
 Using an original two-panel primary data set comprising the remuneration
 plans of 517 of the globe’s largest firms, we reveal the efficacy of
 ‘Barnesian performativity’ that arises when the effects of using a theory
 bring social reality closer to the assumptions or predictions of that
 theory. As a result, the theory becomes self-fulfilling. (Barnes, 1983;
 Mackenzie, 2006: 19; Callon, 1998; Latour, 1987). We map and unpack the
 performativity of Agency Theory on three fronts. Firstly, we theorise how,
 by the introduction of specific felicity conditions, ESG factors can be
 more closely and, critically, better aligned to outcomes generated by the
 underlying performative processes of CEO reward. Secondly, we empirically
 examine and establish how the outcomes of the underlying processes of CEO
 reward (remuneration committees, annual financial statements and
 integrated reports, remuneration consulting, articles, books, and academic
 research) focuses CEO near-term priorities on short term financial goals
 thereby creating a tension between CEO incentives and the adoption of ESG
 factors. Thirdly, we seek to integrate a suite of appropriate ESG metrics
 into the outcomes of the underlying performative processes of CEO pay,
 using specific non-financial short-term incentives that have been
 determined by ESG factors that limit risk and ensure that long term value
 creation and sustainability targets of all stakeholders are met.