Nextgen Healthcare’s Craig Barbarosh On ESG’s Impact On Compensation

Craig Barbarosh

Craig Barbarosh is an experienced public company board member and law firm/business leader with over 25 years of professional experience. Barbarosh serves as an independent director on the boards of Nextgen Healthcare, Sabra Healthcare REIT and Aratana Therapeutics. At Nextgen, he is Chair of the Compensation Committee and has seen firsthand the impact ESG has had on executive compensation.

Barbarosh will be speaking at Corporate Board Member’s annual Building Better Boards: Committee Series event in Chicago on September 10-11th. He caught up with Corporate Board Member to preview his session on the Compensation Committee program, “Balancing Act: Setting Pay for Performance Incentive Goals.”

Below are excerpts from this conversation.

 What are the biggest shifts you’ve seen in executive compensation as ESG continues to gain traction as a strategic imperative?

The biggest challenge in executive compensation is the most basic challenge – to align compensation with desired performance and to create a compensation structure that both rewards executives for short-term and long-term performance consistent with shareholder returns and corporate priorities and to incentivize and compensate for long-term performance consistent with strategic priorities.  As corporate strategies change over time, it is incumbent upon compensation committees to evolve compensation structures to consistently align with strategic priorities and financial achievements.   This evolution can be challenging in the short-term as businesses grow and work through challenges and corporate priorities evolve, particularly given the common reliance upon and associated pressure from designated peer groups in determining compensation.

As compensation committees structure short-term (annual) cash bonus plans and long-term equity compensation plans, it is important to keep in mind that executive compensation should primarily be tied to alignment with shareholder returns.  While shareholder returns are largely financial determined, in the current environment many institutional investors view “returns” more broadly and while financial performance remains as the primary metric, ESG and other considerations that may not directly impact financial performance but can certainly influence TSR performance are becoming more relevant to structuring executive compensation plans and are certainly becoming important topics of discussion among compensation committees.

What are the challenges boards are facing as they try to ensure pay for performance in non-financial metrics?

In general, most public companies are focusing more on performance-based equity compensation with reduced reliance upon time-based equity compensation.  Performance is usually primarily determined by financial performance (revenue, EPS, etc.), but in the current environment of ESG and corresponding focus from institutional investors, performance can also be considered in the context of non-financial factors including success in instituting and executing upon ESG priorities.  While most boards appreciate and focus upon the importance of ESG as a component of company culture, it is important to keep in mind that ESG is largely (but not exclusively) a cultural strategy which can necessarily be a contributor to drive or influence financial performance.

Join Craig Barbarosh at Building Better Boards in Chicago on September 10-11. Register here.

For many companies, ESG considerations are becoming more relevant in the overall performance discussion but many compensation committees are struggling to determine whether and how to implement ESG considerations in the context of executive incentive compensation plans.  As a practical matter, when ESG issues are utilized in compensation structures, they are usually considered as modifiers to the overall funding of executive cash incentives and generally only to modest application at this point.  If specific ESG action items can be attributed to specific executives and can be quantified and measured, they may be included in the performance metrics for the individual executive or, as applicable, the executive team, but again usually only in modest allocations at this point.  For example the annual corporate objectives of the Chief Human Resources Officer might include specific and measurable ESG performance metrics with associated allocated compensation.  For the CEO and CFO, however, ESG tends to be an underlying cultural driver that can have an impact on financial performance, but not necessarily a defined component of the specific incentive plan at present.  However, as implementation of ESG evolves over the next few years I would not be surprised to see a specific ESG component incorporated into more CEO compensation metrics on the theory that ESG tone is set from the top.  As a practical matter, determining the success of many ESG initiatives tends to be more subjective than objective, and it is important for compensation plans to be specific, measurable and quantifiable.   For now, for the CEO and other senior executives, ESG issues may be most relevant in the annual performance evaluation and should be discussed in the larger context of goals and achievements.  Certain industries, such as the energy and technology sectors, may create more opportunities for quantifiable and measurable ESG metrics.

What are some things you hope to discuss on the Compensation Committee program at Building Better Boards with your fellow directors?

As compensation committees structure short-term (annual) cash bonus plans and long-term equity compensation plans, it is important to keep in mind that executive compensation should primarily be tied to alignment with shareholder returns.  While shareholder returns are largely financial determined, in the current environment many institutional investors view “returns” more broadly and while financial performance remains as the primary metric, ESG and other considerations that may not directly impact financial performance but can certainly influence TSR performance are becoming more relevant to structuring executive compensation plans and are certainly becoming important topics of discussion among compensation committees.

I look forward to exploring these subjects with the other panelists during the Building Better Boards Compensation Committee program.