More Boards To Integrate ESG Measures Into Comp Plans

Survey finds boards contemplating adjustments to both annual incentive and long-term incentive plans in large part due to increasing pressure from shareholders and other stakeholders.

There is more evidence that corporate boards are continuing to adjust their approach to ESG measures when it comes to compensation. A new survey of directors by Willis Towers Watson shows that nearly 80 percent of respondents are planning to change how ESG is used within their executive compensation plans over the next three years.

In a statement announcing the survey findings, Shai Ganu, global head of executive compensation at Willis Towers Watson, said, companies are now focusing 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.”

The survey found that 41 percent of respondents plan to introduce ESG measures into their long-term incentive plans and 37 percent plan ESG changes to their annual incentive plans. That boards are contemplating these adjustments is in large part due to increasing pressure from shareholders and other stakeholders to see companies make progress on combatting climate change, improving board diversity and making sure employee safety and compensation are higher priorities.

The survey also pointed out what boards viewed as the primary challenges to integrating ESG measures into their compensation plans. Respondents listed target setting (52%), performance measure identification (48%) and performance measure definition (47%) as areas of major concern.

While it may be true that finding the right ESG metrics to elicit the desired response is challenging, most boards should have the resources and brainpower to solve such challenges – if there is a commitment to succeed.

When it comes to setting targets, for environmental issues such as carbon emissions or diversity issues such as the number of women that should be on a corporate board, many of those targets have been set or suggested by regulators or shareholder groups. Those targets, at the very least, provide boards with a starting place for what may well be difficult discussions, but boards exist for the purpose of making difficult decisions that are in the best interest of the company and its stakeholders. Most boards will rise to the occasion.

Determining performance measurement will require boards to create standards that are easily communicated, simple to understand, and enforceable. The CEO and management team must agree on a system of how executives will be held accountable. They should also agree that the set of accountability standards they come up with is in the best interest of all stakeholders.

Discussions with shareholders are critical to incorporating ESG measures into the compensation plan. Boards should find out which ESG issues are most important to shareholders and then determine how approaches to those issues can be worked into the company business strategy in ways that can boost financial performance. According to the survey 78 percent of respondents believe ESG is a key contributor to stronger financial performance.

And boards shouldn’t be shy about looking at what other companies are doing when it comes to ESG and compensation plans. Chances are that some aspect of a company’s compensation plan will be judged on how it compares to its peers, so if something appears to be working for a competitor, there is nothing wrong with modifying aspects of other comp plans to fit your company goals.