Linking compensation to ESG
Many investors are increasingly keen to see companies link executive compensation to ESG criteria as a means to incentivize management to reach goals such as enhancing diversity or reducing greenhouse gas emissions.
These goals are in turn considered to drive value for companies and other stakeholders. Making such links would have been generally unthinkable just a few years ago and companies are still developing the methods for implementing them. But our research suggests the idea has spread rapidly.
Globally, 44 percent of respondents say their board links executive compensation to ESG metrics, while 45 percent say their board does not. Just a third (33 percent) of respondents at small caps and 42 percent of those at large caps say their board links compensation to ESG. But more than half of those at mid-caps (55 percent) and mega-caps (58 percent) report such links being used.
There is also a strong regional distinction in the degree to which this concept has been taken up: 60 percent of respondents in Europe say their board links executive compensation to ESG metrics, compared with just 37 percent of those in North America.
Globally, among respondents who say executive pay is tied to ESG metrics, the most frequently cited metric is environmental issues such as climate change, water, biodiversity and pollution, cited by 72 percent .
The next-most frequently cited issues are health and safety (48 percent of respondents), diversity, equity and inclusion (DE&I) (44 percent), corporate culture (39 percent), supply-chain management (19 percent) and community relations (17 percent).
Less than half (47 percent) of those in North America whose board links executive compensation to ESG metrics say they use environmental issues, compared with a decisive 96 percent of those in Europe.
Respondents at small-cap companies more frequently cite health and safety (73 percent) than do their peers at larger companies. Those at mega-caps more frequently cite DE&I (64 percent) than do their counterparts at smaller issuers.
