Large U.S. companies are increasingly linking executive compensation to some form of environmental, social and governance performance, growing from 66 per cent in 2020 to 73 per cent in 2021, according to a new report by the Conference Board, Semler Brossy Consulting Group and ESG data analytics firm ESGAUGE.
Between 2020 and 2021, the amount of S&P 500 companies incorporating diversity, equity and inclusion goals in executive compensation grew from 35 per cent to 51 per cent, while employers linking carbon footprint and emission goals to executive pay increased from 10 per cent to 19 per cent.
In 2021, the top approaches used to tie executive compensation to ESG performance were individual performance assessment (49 per cent), business strategy scorecards (48 per cent) and standalone ESG metrics (24 per cent).
Nearly two-thirds (64 per cent) of companies reported having human capital management goals, followed by social performance goals (39 per cent), governance performance goals (38 per cent) and environmental performance goals (25 per cent). The main reasons companies cited for adopting ESG performance measures were signalling ESG as a priority (90 per cent), responding to investor expectations (67 per cent) and achieving ESG commitments (56 per cent).
The results showed companies in the utilities sector (100 per cent) and energy sector (90 per cent) were most likely to tie executive pay to ESG performance. The top two reasons cited for not tying executive compensation to ESG were the challenge of defining specific goals, followed by skepticism about their effectiveness.
“Companies should consider using ESG operating goals for one to two years before including them in compensation,” said Merel Spierings, author of the report and researcher at the Conference Board’s ESG Centre, in a press release. “That allows time to see if those goals are truly relevant for the business and develop strong buy-in from management and employees. It’s especially important for companies to both validate and broadly communicate ESG goals before rolling them out as part of compensation plans for a broader management or employee base.”