Willis Towers Watson's "ESG's growing role poses a challenge: how to integrate it into executive compensation programs" identifies some of the major challenges associated with incorporating ESG measures into incentive compensation plans, and upside/downside considerations relative to these key questions that companies inevitably will address as they tackle this issue:
- Should ESG measures be included in the company's short-term incentive plan or long-term incentive plan (or both)?
- Should the measures be included as separate measures within the incentive arrangements or assessed on a holistic basis relative to the underlying plans and milestones associated with each measure?
- Should ESG factors be incorporated within executives' individual objectives or remain at an organization-wide level?
The firm suggests companies apply its series of foundational, big-picture executive compensation design principles - purpose, accountability, alignment, and engagement - to ESG integration as well as other executive compensation design issues, and prepare for increasing investor and proxy advisory firm pressures to reflect the company's ESG priorities into its executive compensation arrangements.