North American companies’ use of environmental, social and governance (ESG) measures in executive compensation programs is set to expand over the next three years.
This is according to a survey of 164 companies by Willis Towers Watson, which also found that companies have mostly left their executive incentive pay plans intact amid the pandemic.
Just over a quarter of survey respondents (27%) currently include ESG metrics in their executive incentive plans as either a separate performance measure, a modifier, or both. Another 2% plan to include ESG measures in their plans next year, while an additional 27% are considering adding them over the next three years.
“Pressure has been mounting for companies to demonstrate a commitment to ESG,” said Heather Marshall, senior director, executive compensation, Willis Towers Watson. “Some investors are becoming increasingly vocal on environmental issues while the pandemic and social unrest are accelerating the focus on social issues by many boards. This is driving companies to consider incentive plan metrics that link variable pay outcomes to the successful execution of ESG aspects of their business strategies.”
The survey found that the vast majority of respondents (78%) are operating their annual executive incentive plan on a similar basis to last year. Almost half of respondents (46%) indicate that they have maintained the approved goals and will or might use discretion at year-end when assessing outcomes.
Changes to long-term incentive plans appear far less common with only one in 10 respondents (8%) having acted already, and just 21% planning or considering changes.
“Companies may be shifting business strategies during the pandemic, but they are not taking aim at how they pay their executives over the long term. Those few companies that are adjusting performance goals run the risk of inadvertently lowering the bar, which in turn could trigger some investor backlash especially given that the long-term impact of the pandemic is not yet fully known,” said Don Delves, North America practice leader, executive compensation, Willis Towers Watson.