The Advisors' Blog

– Liz Dunshee

The International Corporate Governance Network recently issued this 10-page memo on integrating ESG into executive compensation plans. Consistent with what we’ve been hearing from investors, ICGN notes that the COVID-19 pandemic has the potential to re-invigorate the debate about high levels of executive pay and income inequality.

ICGN proposes key characteristics of short- and long-term pay programs that can advance sustainability initiatives, regardless of location-specific market practices or regulations. It recommends using the SASB materiality map and guidelines from the European Commission as a starting point – and suggests that LTIPs be extended to cover 5-year periods.

What may be especially helpful to companies as they prepare for proxy season disclosures and engagements is this list of sample questions that investors can ask:

1. What are the top three environmental, social or governance considerations of your company?

2. (How) have you engaged with key stakeholders to determine these? Who are the key stakeholders? Where is the process documented? How often is this consultation repeated?

3. How many of these ESG considerations are part of the strategic outlook of the company for the next 5 years? For the next 10 years?

4. Can you define opportunities for balancing long-term value creation, short-term strategic agility, and the building of stakeholder ecosystems all at the same time?

5. How does the company’s mission and its board-level narrative on sustainability issues get translated into robust governance of these issues, a clear strategy, risk (and opportunity) management as well as metrics and KPIs?

6. What are the company-wide KPIs related to these issues?

7. Do you have along-term incentive plan in place? What are the relevant ESG-related performance metrics and gateways for these? What is the evaluation and vesting period for it?

8. How you approach setting well-fitting multiyear performance targets in long-term incentives plans, in a changing – and sometimes unpredictable – world?

9. Do executives have a share-ownership requirement? What multiple of their annual fixed salary is this? What’s the time-frame after their appointment that they need to reach this level? What is the holding period requirement after cessation of their executive role?

10. How do you entice ownership of environmental, social and governance issues in company governance and among directors, executives and employees?

11. What makes your disclosure on these issues credible and reliable?

12. How are these issues integrated in the compensation packages of executives and others?

13. What are your three-and five-year targets regarding integrating sustainability in the remuneration and what is the roadmap to get there?

14. What help would you welcome from the investment community on this?

15. Do you benchmark your current remuneration practices against peers (also in the context of the pandemic)? How do you know which peers to look at for best practice?