Center On Executive Compensation

New Tracker Allows Companies to Benchmark ESG Incentives

As companies reflect on current incentive plan designs and (cautiously) assess the inclusion of ESG metrics, Farient has launched a new ESG tracker that will help organizations home in on what their peers and similar sized companies are doing.

New tool. It’s an interactive module that benchmarks the prevalence of ESG measures by index, company size and industry. The information allows companies to explore trends from 2021 and highlights companies that have modified their ESG measures from year to year.

S&P 500 Data. So far in 2023, over 75% of companies reported using an ESG measure. The metrics are broken down by type:

  • 92% using social measures (consistent since 2021)
  • Nearly 70% using environmental measures (a significant increase from 39% in 2021)
  • 40% using customer measures (a drop from 46% in 2021)
  • 23% using governance (a slight increase since 2021)
  • 17% with community (a modest increase from 11% in 2021)

The tracker is the newest in Farient’s suite which also continuously monitors CEO pay, CEO wealth, Pay Versus Performance, Say on Pay and Pay Ratio information.

Focus on the why and how. Meanwhile, Vanguard issued a special bulletin on the “do’s” and “don’ts” of how to tie ESG metrics to incentives. The bulletin warned against ESG metrics that are not clearly tied to strategy, not linked to a financially material risk or opportunity or maxed out year after year (suspicion of softballing targets). The suggestions are particularly interesting in light of Republican pressure on companies to reduce the use of diversity targets and initiatives.

Vanguard’s Best Practices:

  • Focus on materiality. Consider a framework that maps ESG metrics to the company values.

  • Alignment to appropriate time horizons. Understand the rationale behind metrics that should be tied to the annual plan versus long-term plan.

  • Robust disclosure. Include an explanation of target achievements (either Committee assessment or scorecard), use of discretion and any changes to targets.

  • Stretch targets. Committees should set stretch goals with quantitative targets (Center note: this may contradict the edicts of anti-ESG lawmakers and investors).

  • Use modifiers to maintain the focus on financial metrics and avoid misaligned pay-for-performance.

Questions Vanguard may ask the Board:

  • How does the board determine the materiality of risks to long-term investment returns?
  • Can you explain how ESG metrics are key drivers of long-term performance and returns?
  • How have you determined the time horizon of the metrics chosen in your plan?
  • How do you ensure that the targets set are robust, ambitious, and where appropriate, independently verified?

Published on:

Authors: Megan Wolf



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