Consistent with advice from other leading compensation consultants, Pearl Meyer’s “In the Headlong Rush to Put ESG Metrics into Incentive Plans, We May Need a Speed Bump” advises companies to proceed with caution before integrating ESG incentive metrics into their incentive plans notwithstanding investor and other external pressures to do so. The post raises numerous sound considerations, including these:
- Are ESG metrics/goals integral to the business strategy?
- Should the company incentivize ESG performance or is achievement a “table stake” that would/should be achieved anyway?
- Are the metrics sufficiently defined? Can the company set robust goals and measure achievement, and can it be audited?
- Can the company make a difference over the short term? Should the metric have a performance period longer than one year?
- Is the incentive material?
- If the weight on financial metrics is reduced/replaced with an ESG metric, is the company sending the right message?
- Will shareholders accept paying for ESG performance when financial performance is poor or doesn’t achieve threshold?
The overarching message of the post is to avoid “jumping on this bandwagon” due to external pressures without due regard for key considerations such as those listed above. As the firm correctly observes, companies have many important goals that are not directly incorporated as stand-alone metrics in their incentive plans that management is expected to (and often successfully does) pursue and attain.
See our recent reports on this topic: “Sustainability-Linked Pay” and “Sustainability Pay Metrics: Walk Before You Run”; the Society’s discussion of ESG pay metrics in our recent SEC comment letter on climate disclosure (pages 20 – 22); and additional resources on our Executive Pay page »Non-Financial Metrics (Sustainability, DE&I, etc.).
This post first appeared in the weekly Society Alert!