Exec compensation increasingly tied to ESG

Social and governance issues are most common, with environment playing a small part

executive compensation


Nearly three quarters of S&P 500 companies now have at least one kind of ESG factor tied to executive compensation, although climate change is scantly present in those arrangements.

As of 2021, 73% of company executives in the US had ESG performance linked to bonuses or other awards, up from 66% in 2020, according to a report by The Conference Board. That increase is due in part to more pressure from investors, who have been more likely to vote ‘no’ on say-on-pay ballot measures and bring shareholder resolutions centered on ESG concerns.

While ESG factors have become common in determining compensation, human capital management is by far the frequent area integrated, with 64% of S&P 500 companies using it, according to The Conference Board. Following that are “social performance goals,” which include human rights and product safety, at 39%. Meanwhile, 38% of companies incorporate governance into executive pay metrics.

Just 25% use environmental performance goals, however.

In the subcategories of those areas, there was a significant increase in companies using diversity, equity and inclusion goals tied to executive compensation, going from 35% in 2020 to 51% in 2021, according to the report. For those using carbon footprint and emissions reduction goals, the rate went from 10% to 19%.

Two sectors that have been under more scrutiny from investors – utilities and energy – have become the most likely to tie ESG factors to executive compensation, the report found. Among respondents in utilities, all used ESG criteria of some kind, while 90% of energy companies did.

By comparison, the rates were lower in the consumer discretionary and information technology sectors, at about 55% each.

The top reasons companies cited for not using ESG factors in compensation were difficulty in defining goals (50%), concerns about measuring or reporting (35%), skepticism about effectiveness (30%) and ESG already being part of other performance measures (30%).

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