In the Wall Street Journal, Alex Edmans argues against ESG targets in incentive compensation. Here’s why he’s wrong (but a little right).
He is a little bit right in saying that “The evidence shows that paying for targets encourages executives to hit those targets. But it doesn’t necessarily encourage them to improve performance. The crux of the problem is that you can’t measure many of the performance dimensions that you care about.” The obvious conclusion from that is not that ESG targets are bad; it is that our current targets are ineffective. He makes the valid point that targets are often designed around what can be counted rather than what counts, and he is a little bit right that there is a lot of inconsistency in ESG metrics, as we discussed in our SEC filing.
This is the Barbie “math is hard” excuse and it applies just as much to the current targets for executive compensation. and they seldom complain about the math for those plans. Doing this math is literally why we pay boards and executives the big bucks. If it’s too hard for them, get someone better.
Edmans is a little bit right in saying that ESG goals are realized in long-term shareholder value, and we agree (and have advocated for a long time) that substantial pay should be in long-term stock grants of restricted stock.
But he is a lot wrong when he says that is the reason to give up on ESG targets (except, he says in some cases like decarbonization. If the board meets its obligation as fiduciaries to assess risk and set strategy, designing targets to reach those goals should not be too hard. The key is to be clear with investors about what those goals are and how the targets will achieve them.