Executive compensation
All the same, as environmental, social and governance (ESG) factors have become a growing part of corporate life, companies are increasingly including these measurements in their executive compensation packages. As factors not traditionally tied to financial returns, many of these new ESG goals are longer-term metrics of compensation plans. This is something JUST Capital, a non-profit dedicated to measuring and improving corporate performance, has been tracking for the past four years. In the event, Allen and her colleagues have seen a trend towards more ESG- related compensation, if admittedly from a low base. For example, from 2020 to 2022, there has been an increase from 7% to 18% on ESG governance data points – made up of ESG risks linked to executive remunerations, ESG KPIs in compensation metrics and formal board schedules to review ESG.
Green with envy
The shift towards ESG is growing rapidly across various industries. According to a recent poll from The Conference Board, a non-profit, the basic idea is to signal the prioritisation of ESG and respond to investor expectations and company commitments. As The Conference Board reported, 57% of executives believe their companies have changed in the past few years, with many adding new ESG goals since 2020. There are plenty of examples of what this looks like in practice. For instance, Alison Omens, the chief strategy officer at JUST Capital, highlights MasterCard’s recent move towards integrated compensation that, after initially only being directed at executives, now includes the entire workforce, incentivising employees through bonus calculations to improve their employer’s environmental footprint. This comes after corporate America has faced pressure over ESG-related policies and practices from investors, facing over 500 resolutions on ESG from shareholders. Europe, for its part, has been even more proactive: 90% of major European companies now use ESG metrics. Unilever, for instance, has integrated its sustainability KPIs into its long-term incentive plan since 2017. At the same time, the so-called ‘Unilever Performance Share Plan’ is a key part of its remuneration policy, basing 75% on financial performance and 25% on the company’s sustainable KPIs. None of this is entirely new. Particularly infamous polluters – for instance, oil companies – have long integrated some measure of ESG into their pay packages. The experts see the ESG obsession of recent times as something new.
“But what we’ve really seen over the last no more than three years really is an expansion of the use of ESG metrics across the market, and also the use of metrics that are perhaps a little bit less directly related to the company’s core value drivers and core
Chief Executive Officer /
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operations,” emphasises Tom Gosling, an executive fellow at the London Business School and European Corporate Governance Institute. “So, a much greater predominance of, for example, metrics relating to climate change, metrics relating to diversity and inclusion.”
According to Gosling, this focus will form roughly 10–20% of the metrics that determine bonuses or long- term incentive plans. For oil and gas companies, that may rise to 20–30% and encompass such areas as clean energy targets. Of course, this will be different across sectors – what matters is focusing on what end consumers care about.
This could, for instance, take the form of carbon footprint – but also working conditions in supply chains or sustainable packaging. A multinational like Nestlé might be keen to focus on palm oil reduction. In financial services, meanwhile, ESG metrics would take yet another form, based around sustainable finance initiatives, lending and investments strategies, as well as diversity and inclusion targets.
“It makes perfect sense that a company would tie ESG goals,” stresses Allen, adding that the rationale for pay and executive compensation is to incentivise behaviour – but also tells the executive and public what the board’s expectations are.
Hitting the target
Not that the future of executive compensation is necessarily clear. “What we are seeing is that some [companies] are doing it as a lever for accountability, and some are doing it in a way that does not feel like it’s going to move the needle at all – and just might increase pay without any performance that is necessarily useful,” is how Melissa Walton, the executive compensation and climate senior associate at As You Sow, puts it. The lack of transparency over ESG goals is a key challenge here. As You Sow discovered in 2022 that only four out of the largest 48
ESG is now seen as an essential building block of a company.
73% Harvard Law School 86%
The percentage of Americans who support the SEC’s move to mandate climate-related disclosures.
JUST Capital 25
Proportion of S&P 500 companies tying executive compensation to ESG performance, up from 66% in 2020.
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