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ESG metrics in executive compensation: A multitasking approach

Author

Listed:
  • Agarwal, Vikas
  • Gómez, Juan-Pedro
  • Hosseini, Kasra
  • Jha, Manish

Abstract

We model firm executives' compensation incentives when ESG metrics are added to their performance-vested contracts. Drawing on multitasking theory, we predict that incentives tied to standard accounting or financial metrics are reduced after introducing ESG metrics to induce executives to reallocate effort toward ESG goals. Empirically, the expected pay-performance sensitivity of standard metrics decreases by about 20% after ESG adoption, especially when ESG metrics are more numerous, less complementary, or less measurable. The tradeoff is associated with improved ESG ratings, consistent with efficient incentive design under multitasking that optimally balances effort across financial and ESG objectives.

Suggested Citation

  • Agarwal, Vikas & Gómez, Juan-Pedro & Hosseini, Kasra & Jha, Manish, 2025. "ESG metrics in executive compensation: A multitasking approach," CFR Working Papers 25-10, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:330666
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    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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