“Inclusion of ESG Metrics in Incentive Plans: Evolution or Revolution?” from Pay Governance reports on the results of the firm’s survey of nearly 100 companies* on their use or planned use of ESG metrics in 2020 and 2021 incentive compensation plans.
Among the key takeaways:
- 22% of companies in 2020 included ESG metrics in their incentive compensation plans compared to 29% for 2021; 21% of companies said they were unsure if their 2021 incentive compensation plans will include ESG metrics. Of those that included them, 76% said they used either solely quantitative or a combination of quantitative and qualitative measurements in the design of their 2020 incentive plans and plan to do the same for 2021.
- Consistent with our other benchmarking resources on this topic, most companies include ESG metrics in the annual incentive plans in lieu of LTIPs. Companies most commonly incorporate ESG metrics via a scorecard approach (where ESG is measured within a scorecard category, but the individual ESG metrics are not individually weighted) rather than a measured metric approach, but some companies use multiple approaches.
- The weighting of non-financial metrics generally is typically less than 25%, which is consistent with companies’ plans for ESG metrics for their 2021 incentive plans.
- Social metrics are the most commonly used ESG metric category (87% of companies in 2021 incentive plans), with diversity leading the pack (88% in 2021 compared to 67% in 2020).
- Companies that include a social metric most commonly focus on gender representation, race representation, and attracting and retaining diverse talent.
- Nearly ¾ of the sample companies reported discussing ESG with their shareholders in the last six months, and a significant 40% of companies said shareholders requested ESG metrics be included in their incentive plans.
*The study sample consisted of 95 companies, median revenues: $2.8B, median market cap: $4.9B (measured as of Feb. 1), 34% in the S&P 500.
And Equilar’s analysis of ESG compensation metrics for the 94 publicly traded Fortune 100 companies over the last year revealed 38 companies disclosing ESG –compensation links – nearly all in annual incentive plans (as opposed to LTIPs). Based on Equilar’s categorization of the wide variety of metrics used, culture and diversity (which Equilar observes tend to cross industry boundaries, unlike some other ESG metrics) were the most common, as shown here:
The post provides examples from recent proxy statements of culture metric and diversity metric disclosures.
See our report: “Incorporating ESG Metrics into Incentive Pay Plans” and additional resources on our Executive Pay page. This post first appeared in the weekly Society Alert!