Environmental, societal and governance metrics and the outcomes of the underlying performative processes of Chief Executive Officer pay

Blair, Chris and Hesketh, Anthony and Leitch, Claire (2024) Environmental, societal and governance metrics and the outcomes of the underlying performative processes of Chief Executive Officer pay. PhD thesis, Lancaster University.

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Abstract

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&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 ( factors has sparked debate on how corporate performance should determine the financial reward of Chief Executive Officers’ ( 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 (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. 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 ( CEOs ( 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 origin al 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. (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 bee n determined by ESG factors that limit risk and ensure that long term value creation and sustainability targets of all stakeholders are met.