April 21, 2020
ESG & Compensation Plans: Proceed with Caution
– Lynn Jokela
Not long ago, I blogged about starting the conversation with the board on integrating ESG into executive compensation plans. As much as investors might be calling for companies to do that, this blog from Alexa Kierzkowski and Dan Ryterband of F.W. Cook in Corporate Board Member says “proceed with caution.”
As most of us know, moving too quickly to try and integrate anything can backfire. Here’s some of what Kierzkowski and Ryterband had to say for those considering integrating ESG with comp plans:
How ESG is embraced in a compensation plan creates the potential for unintended consequences.
ESG goal setting is challenging and missed goalposts are potentially more problematic. For example, failing to meet a carbon emissions target or a diversity goal is not as easily explained in proxy statements as missing a profit target.
There’s also the possibility that efforts to incorporate ESG-related metrics in bonus opportunities will be interpreted as signifying how much, exactly, a specific concern matters to a company. Also, inclusion of some ESG metrics may raise questions about the exclusion of others.
One of the challenges for management and the board when trying to incorporate ESG-related metrics in bonus opportunities will be to vet investors’ and other stakeholders’ priorities against their strategic vision for the company. Applying resources to maximize your ESG scores and improve on the metrics investors may believe are most important may not actually deliver on the organization’s value proposition.
What’s the takeaway? Proceed cautiously and think about whether incorporating ESG-related metrics in compensation plans is the only or best way to measure ESG-related effort/progress.