If Sweden’s Cevian Capital has its way, this coming proxy season European shareholders will be voting on a lot more compensation plans that tie a portion of executive pay to whether companies hit various ESG targets.
The activist investment firmhas called on“欧洲上市公司将在2022年的年度股东大会上开始或加速ESG目标，以将ESG目标纳入薪酬计划。”像其他投资者和倡导者一样，Cevian认为，薪酬的链接将激励管理团队将材料ESG目标嵌入公司战略中。
"I think investors’ expectations have changed from profit maximization to sustainable value creation," Jun Frank, an executive director at ISS Corporate Solutions, told GreenBiz. "And if the desired outcome has changed, then I think it also makes sense to realign incentives to reflect shifting expectations."
In terms of pure numbers, the pressure appears to be working. The percentage of public companies linking ESG performance to C-suite pocketbooks is climbing and shows no signs of slowing down. But as with all things ESG, if you scratch the surface, you’ll find a range of behaviors — from authentic, meaningful action to blatant greenwashing.
为了避免后者，甚至对后者的看法，应该准备好回答许多棘手的问题。例如，他们是否选择特定的，可测量的ESG目标（例如温室气体排放）对行业和公司本身来说是重要的？公司的长期战略是否嵌入了目标？他们是否激励管理团队伸展，实际上改善了ESG的成果，超越了易于访问的目标？还是公司只是在做计划要做的事情，并为其支付更多的钱？
"I think there's a real quality and effectiveness overlay that we have to put on all of this," Tom Gosling, an executive fellow of the Centre for Corporate Governance at London Business School, told GreenBiz. "One of my big fears about this sort of stampede towards including ESG targets in executive pay is that it's likely just to lead to more pay and not more ESG. And we need to recognize that as a potentially big unintended consequence."
Studies looking at the number of companies that incorporate ESG targets into their executives’ incentive pay vary in their findings, but one thing is clear: The numbers are rising.
Astudy published in Decemberfound that the percentage of FTSE 250 companies — the largest 250 businesses on the London Stock Exchange — using ESG measures in annual bonuses had increased by 57 percent in a year. Researchers in the executive compensation practice at business consultancy Alvarez & Marsal analyzed annual reports published through March and found 30 percent of FTSE 250 annual pay packages included ESG metrics, up from 19 percent the previous year. This follows on the heels of researchpublished earlier in 2021by London Business School and PwC, which found that 45 percent of the 100 largest U.K. companies had introduced ESG metrics into executive compensation plans, and one-in-four U.K. companies had added ESG metrics to long-term incentive packages.
The United States (once again) lags the U.K. andWestern Europeon the practice. Research by ISS Corporate Solutions, done over roughly the same time period as the London Business School/PwC study, suggests that 20 percent of companies on the S&P 500 link ESG performance measures to executive compensation.
Among themare Apple, Chipotle, McDonald’s, Clorox, Starbucks and National Grid.
ESG targets are typically linked to 10 percent, sometimes as much as 20 percent, of an executive’s incentive pay. And companies tend to favor baking it into short-term incentive plans (a.k.a. the annual bonus) rather than long-term incentive plans, especially in the U.S. Analysis by ISS shows that 14.6 percent of S&P 500 companies with ESG targets link those targets to annual bonuses, while only 1 percent tie them to long-term incentives.
This is something investors and advocates would like to see change, because it often takes time, five years or more, for shareholder value and ESG outcomes to align. This can be especially true when you’re talking about climate and other environmental targets.
One of my big fears about this sort of stampede towards including ESG targets in executive pay is that it's likely just to lead to more pay and not more ESG.
Shareholder advocate As You Sow last year dug into the executive pay packages at 48 large corporate emitters in the United States and found that only four companies made an explicit link between a percentage of executive pay and achieving a specific emissions reduction. And only two linked that reduction target to long-term pay.
"It is critical that boards of directors find a way to incentivize executives to focus on the long term," Rosanna Landis Weaver, who manages the organization’s wage, justice and executive pay program, wrote in a博客文章关于9月的主题。“投资者几乎普遍同意，最重要的长期问题是气候。现在是时候将薪酬实践集中在最重要的问题上，以激励气候行动。”
But corporate boards aren’t necessarily choosing the ESG targets that investors care about.
例如，当弗兰克（Frank）和他的ISS同事在2020年进行研究时，他们发现，不到13％的美国公司将ESG绩效与薪酬息息相关。近78％的人使用社会指标，迄今为止最常见的是员工健康和安全，其次是员工敬业度和培训以及劳动力多样性。其余的人属于一般公司责任类别。
Old-school social and governance metrics such as health and safety, risk and employee engagement have appeared in bonuses for some time and, depending on the industry, may not be exactly the type of targets investors have in mind when they think ESG.
That said, the use of "new" ESG metrics, particularly targets related to climate change, are becoming increasingly common. In another report published in 2021 by consulting firm Willis Towers Watson, survey respondents from corporate boards were asked to rank the importance of five ESG priority areas over the next three years: environmental; social (customer); social (employee); social (community); and governance. The largest group by far, 43 percent, listed their environmental goals as their No. 1 priority.
选择有意义的指标至关重要。ISS报告指出，投资者通常希望公司具有可量化和可衡量的ESG目标，并透露为什么他们认为所选目标对他们来说是最重要的目标。
The report highlights Verizon as a company that has done a good job of this. The telecommunications giant used three ESG metrics in its fiscal 2020 executive compensation: workforce diversity; diverse supplier spending; and carbon intensity reduction. Then it aimed for specific targets: a U.S.-based workforce made up of 59.3 percent of women and people of color (POC); at least $5.7 billion of supplier spending directed to POC- and women-owned firms for 2020; and a 10 percent reduction in carbon intensity, defined as the carbon it emits divided by the terabytes of data transported over its networks.
To achieve the right mix, it’s important for boards to take their time incorporating ESG targets into compensation packages rather than to rush it and create links that seem inauthentic.
"Greenwashing is a risk, so I think these compensation plans do have to be evaluated carefully on a case-by-case basis," Weaver told GreenBiz.
Several U.S. oil and gas companies came under fire in October, when the华盛顿邮报透露that the design of their incentive programs allowed executives to get their bonuses even in years when the companies caused major environmental damage or total emissions went up.
Doing this stuff badly is almost worse than not doing it at all.
In a particularly egregious case, Marathon Petroleum awarded its CEO a $272,000 bonus for surpassing environmental goals the same year the company spilled 1,400 barrels of fuel in an Indiana creek — its worst oil spill in years. The reason? Because the performance reviews of Marathon’s top executives consider the number of significant oil spills in a year, not the total volume of oil, and the Indiana spill counted as just one of 23 incidents in 2018.
"That's a classic example of what I call hitting the target but missing the point," Gosling said.
Gosling, for one, is skeptical that linking ESG performance targets to executive pay will actually change executives’ behavior. Because the CEO is responsible for setting strategy, he said, ESG targets often simply reflect what the company was already planning to do anyway.
That doesn’t mean the practice has no value, he added. It can be a useful way to reinforce messaging about long-term strategic priorities. And the discussion around pay can catalyze deeper conversations around how the company will actually meet its long-term goals, the steps it will need to take to get from point A to point B.
Still, investors would benefit from focusing their attention on the companies or sectors where they think tying ESG metrics to executive pay will do the most good. A firm such as Cevian Capital, a highly engaged investor dedicated to a limited number of companies, has the time and resources to engage in these debates. Other investors may need to choose their battles.
"Doing this stuff badly is almost worse than not doing it at all," Gosling said. "So I think we really need to be thoughtful about what difference we believe we're making here and try to focus on situations where we believe we can get it done well."
