Standalone ESG Goals Gain Traction in Executive Incentive Plans

As companies continue to integrate ESG metrics into their incentive plans, the question of how to effectively do so remains a delicate balancing act, according to a new FW Cook report on ESG metrics among the top 250 US public companies.

Although incentive plans should be designed to support the company’s business strategies, reflect progress against established goals and drive leadership accountability, Cook states, companies are also rightfully concerned about differing stakeholder perceptions and the unintended consequences that come with increased transparency. These expectations have created a visible shift toward the use of specific, standalone ESG metrics rather than including them in a broad individual performance component of pay.

The Cook study found that 74% of companies now disclose ESG measures in incentive plans (up from 64%) and 69% of those provide specific and detailed goals.

• While qualitative individual performance measurements are still the most common approach, they decreased in prevalence to 44% (from 59%) over the past year.
  
  
• The use of standalone weighted metrics increased to 37% and team-wide scorecards increased to 32%.
  
  
• Diversity and inclusion measures saw the largest increase into stand-alone weighted metrics; 69% of companies disclosed detailed and specific goals in areas such as leadership representation and diverse hiring and promotion.
  
  
• While quantitative disclosure of ESG goals has increased, disclosure of achievement against those goals remains largely qualitative (65%).  Only 18% of companies provided quantitative disclosure of the performance achievement used to arrive at an incentive. This may change as companies increasingly turn to quantitative goals, since results will be evident in future proxies.

Cook closes with key questions to consider with regard to balancing stakeholders:

• Understanding that not all stakeholders support the same investment strategy, social agenda and time horizon, what are the business implications of including an ESG metric?
  
  
• If an ESG metric is included, which financial metric is reduced in weighting?
  
  
• What level of disclosure can be provided?
  
  
• Are goals able to be disclosed quantitatively?
  
  
• Will greater (or lesser) detail expose the company to criticism for lack of rigor in targets or weak performance on stretch goals?

Once it is in the incentive plan, can an ESG metric be removed?