– Lynn Jokela
We’ve blogged before about incorporating ESG metrics into incentive programs. Even though doing so can seem daunting, a recent report from Willis Towers Watson says that 50% of S&P 500 companies include ESG metrics in annual incentive programs compared to 4% that do so for long-term incentive programs. The report discusses some of the design features for plans incorporating ESG metrics including funding formula components and payout formula modifiers.
The report shows that funding formula components generally cover topics such as people & HR, customer service, diversity & inclusion, employee health & safety, governance and environmental & sustainability. It also says that 44% of S&P 500 companies include human capital measurements in their incentive plans. This seems somewhat intuitive as companies are likely further ahead in terms of tracking human capital data as compared to topics such as environmental and other sustainability measures.
The COVID-19 pandemic will likely lead to more calls for tying ESG factors to executive compensation as more are recognizing that environmental and social issues can create large-scale financial risk. This NY Times article shares thoughts from ISS and says that some directors may see ESG metrics as something management has more control over as investors will likely be more sensitive to executive pay given all the tragic consequences of the COVID-19 pandemic.