More Companies Looking to Link ESG Metrics to Executive Incentives

Target-setting, performance measure identification and definition seen as key challenges to using ESG metrics.

Directors and executives at global corporates increasingly accept the need for ESG metrics to be incorporated into executive pay, with four in five (78%) respondents to a Willis Towers Watson survey saying they are planning to change use of ESG measures in incentives packages over the next three years.

According to the firm’s ‘2020 ESG Survey of Board Members and Senior Executives’, more than four in ten (41%) respondents said their companies plan to introduce ESG measures to their long-term incentive plans over the next three years, and 37% said they plan to introduce ESG measures to their annual incentive plans.

But the survey also flagged potential barriers to use of ESG metrics in incentive packages, including target setting (52%) and performance measure identification (48%) and definition (47%).

“With investor and shareholder interest in ESG and sustainable investing increasing, companies are accelerating their focus on ESG initiatives,” said Shai Ganu, global head of executive compensation at Willis Towers Watson. “We know from our research and consulting that companies’ greatest focus is on a stronger alignment of executive compensation plans and ESG priorities, particularly with climate change and environmental measures, inclusion and diversity matters, and overall human capital governance.”

While many firms may be planning to incorporate ESG metrics more fully into executive incentive packages, it is not yet common practice to link c-suite pay to tackling climate risks. A global survey of large firms published last month by Big Four accountancy firm KPMG and global top ten law practice Eversheds Sutherland found that just a quarter of companies offer remunerative incentives for directors to achieve decarbonisation targets.

According to a white paper published by the Willis Towers Watson in October, a minority of directors interviewed said executive incentive plans should not include ESG metrics, as it may diminish the importance of managing ESG factors to a “checkbox” exercise.

A recent blog post by an Alex Edmans, Professor of Finance and Academic Director of the Centre for Corporate Governance at the London Business School, also warned against turning sustainability into a matter of compliance. He stated that focusing on quantitative ESG metrics can often ignore qualitative aspects, and must be used with caution.

While most companies surveyed by Willis Towers Watson are developing ESG implementation plans (84%), or have identified their ESG priorities (81%), less than half (48%) have incorporated ESG plans into all aspects of their business, from strategy to product offerings.

“In the UK, although some companies are revising their use of ESG measures to support their executive pay programs and overall inclusion and diversity initiatives, more work needs to be done,” said Jessica Norton, UK Executive Compensation Practice Leader, Willis Towers Watson.

“We expect that the level of interest and involvement of more organisations will only rise as investors, consumers and employees increasingly press companies for a strong commitment to ESG as well as hold their CEOs more accountable,” she said.

Willis Towers Watson conducted the survey between September and October 2020, collecting responses from directors and board members of 168 organisations through North America, Europe, Asia, Africa and the Middle East.

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