Executive bonuses increasingly linked to ESG factors

Over half of companies using ESG factors specifically focus on diversity as a metric


Christine Dawson

ESG factors are increasingly forming part of the compensation metrics of executives’ bonus pay in the US, according to a survey by law firm Shearman & Sterling.

The firm’s 2021 corporate governance survey shows factors such as diversity and pay equity increasingly play a meaningful role in executives’ take-home incentive pay, although traditional quantitative factors, like shareholder return and financial and operational metrics, still dominate.

Of the 100 largest US public, non-controlled companies with equity securities listed on the NYSE or Nasdaq, just over 40 said they incorporate ESG metrics into their executive compensation program and 15 announced incentive compensation for 2021 will include new ESG metrics.

They survey found out of the companies that used ESG metrics, more than 50% (27) specifically referenced a focus on diversity as a metric.

Driving forces

Annie P. Anderson and Matthew H. Behrens, both associates in compensation, governance & ERISA at Shearman & Sterling, said there were three main driving factors for the changes to compensation metrics. Writing about the findings of the survey, they noted institutional investors can see the business case for increased sustainability and are therefore pushing corporates to make these changes.

The role of the corporation itself is also changing, according to Behrens and Anderson. They pointed to the Business Roundtable statement signed by 180 CEOs in 2019 which said corporations should commit to serving the interests of all stakeholders, including customers, employees, suppliers and communities, rather than just shareholders.

“The incorporation of ESG into incentive compensation plans is a key measure that observers will use to track whether the signatories’ companies are honoring this new philosophy,” they wrote.

Finally, the pair said, there have been regulatory activities which have driven this area further. Behrens and Anderson pointed out the Securities Exchange Commission is currently developing a mandatory climate risk disclosure rule and the fact a recent rule change enables companies to increase the subjectively determined payable bonus, such as from a commitment to the company’s ESG principles.

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