The Advisors' Blog

– Lynn Jokela

We continue hearing more about how companies are incorporating ESG metrics into incentive programs – earlier this week, I blogged about Marathon Oil’s changes to its incentive programs and here’s an entry about how Apple is incorporating an ESG measure in its annual incentive program. A recent Farient Advisors’ report analyzes global data on stakeholder measures incorporated in incentives.  The report includes comparative data across global regions and industries, along with high-level data about common issues, such as how much weight to assign to the measures. Here’s an excerpt with a few takeaways:

In terms of mechanisms for incorporating stakeholder measures in incentive plans, the report shows that they’re typically incorporated as weighted measures or within a weighted scorecard. Fewer companies use measures as a modifier or a basis for general discretion.

One challenge for companies incorporating stakeholder measures in incentives is how much weight to assign to the measures. Globally, stakeholder measures are weighted at approximately 20% in incentive plans – the median weighting across regions is also 20%, with Australia being the only outlier at 30%.  Even in industries in which stakeholder measures are more prevalent, companies commonly weight the measures at about 20% of total incentive mix.

When it comes to measuring progress on stakeholder interests, most companies use internally-derived goals.  The report notes that there are reasons supporting use of internal goals – they can be tailored to a company’s specific strategy and corporate purpose.  The report also notes that there are reasons supporting use of external benchmarks  – they can provide objectivity and help promote better engagement with investors and third-party rating agencies.  For companies using external benchmarks, the Dow Jones Sustainability Index  and Carbon Disclosure Project are the most frequent benchmarks.

The different industry mix in each region is one reason why the incidence of stakeholder measures in incentives differs by region – Australia has the highest prevalence of stakeholder measures in incentives and has a heavy mix of materials and financial services companies in its economy whereas the U.S. has the lowest prevalence of stakeholder measures in incentives and has a more diversified economy with a heavy mix of technology companies.  Information technology and consumer discretionary industries use stakeholder measures in incentives less frequently and as a result, the U.S. and Continental Europe exhibit the lowest prevalence of stakeholder measures in incentives.