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ESG and D&I Will Be Staples in Incentive Planning

This is the second of two articles on the session “Executive Compensation in Unpredictable Times” from week three of WorldatWork’s “Total Resilience Virtual Conference & Exhibition.” Read the first article here.  

In the executive compensation space, two topic areas — diversity and inclusion (D&I) and environmental, social and governance (ESG) are gaining considerable steam of late.

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A group of panelists — Kathryn Neel, managing director at Semler Brossy Consulting Group, Steve Harris, president and head of the Atlanta Office at FW Cook Advisors, and Gregg Passin, senior partner and executive solutions leader at Mercer — tackled these topics in a session at week three of WorldatWork’s “Total Resilience Virtual Conference & Exhibition” on July 22.

Session attendees illustrated how novel these two concepts still are when it comes to developing exec comp strategies around them. An in-session poll revealed that 44% of companies have not included ESG and D&I metrics in their incentive plans yet, although 36% indicated they are beginning to have discussions about including both. Just 8% of companies in attendance already have a standalone measure for each, while 7% said they already capture this data through individual assessment.

“Not many companies have specific metrics related to these in their plans yet,” Passin said. “Environmental metrics we see in heavy manufacturing, mining and utilities, but not much outside of that. On the D&I side, it’s probably 15-20% of companies that have some metrics related to D&I. Some that are quantitative and some that are qualitative, but we do think we’re going to see more interest in this.”

Passin added that there is still some debate about whether adding ESG and D&I metrics into exec comp incentive plans is the right way to approach the issues.  

Neel asserted that for companies that are considering implementing ESG metrics into their annual and long-term incentive plans, they should only do so in a way that it supports the business strategy.

“You’re not adopting a metric for the metric sake, it’s really because it supports the business strategy,” Neel said. “So the first step is to evaluate business strategy and where ESG topics fit in with that to identify which types of metrics make the most sense to include and where do they make the most sense to include – in longer-term or shorter-term (incentives)?”  

A 2019 spot survey by Mercer found that among companies that use ESG metrics, the metrics comprise approximately 5% of all incentive plan metrics, but usually apply beyond senior executives to all incentive plan participants. 

Harris said companies have to assess what’s important to measure within both D&I and ESG and make sure they have baseline information before rushing into the process, which could yield an inaccurate measurement.

All the panelists agreed, however, that ESG and D&I metrics are here to stay and organizations need to invest time and resources into both going forward.

“This is a trend that is going to stay with us,” Neel said. “It won’t be a trend; it will just be a practice. I would do some research on what other companies are doing, what are investors doing, what are trends in this area, because very soon you may be left behind. It’s not an area that would be strategically smart to be left behind in.”

About the Author

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Brett Christie is the managing editor of Workspan Daily.


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