May 12, 2021
AllianceBernstein Wants to See ESG Linked to Pay & Outlines “Best Practices”
– Lynn Jokela
AllianceBernstein recently released a report summarizing its “2020 ESG Engagement Campaign” and it says one of its two most important ESG themes in 2020 was the inclusion of ESG metrics in executive compensation plans. In 2020, the asset manager engaged with 358 companies, almost half of which were companies based in North America. What does AllianceBernstein want to see?
Our objectives were the same in every engagement: to ask companies if they include ESG metrics in their executive compensation plans, and to encourage them to include at least one material and measurable ESG metric in their 2021 plans.
In 2020, AllianceBernstein asked 293 companies whether they had measurable ESG targets in their executive compensation plans and found 45% of management teams explained that they do. Even more companies said they would consider incorporating ESG targets in their compensation plans.
Some issuers claimed that ESG is inherently incorporated in their compensation plans because ESG issues impact the fundamental financial performance metrics they use to determine pay outcomes. We don’t think ESG factors should be sidelined this way – they should balance financial performance metrics.
The report also outlines AllianceBernstein’s “best practices” for incorporating ESG metrics in executive compensation:
1. We don’t endorse incorporating a long list of ESG-related metrics, each weighted less than 1% in determining executives’ incentive pay. Instead, we promote a more targeted approach with fewer metrics (two to three is ideal), each with a meaningful weight in determining pay outcomes.
2. Companies should identify the ESG issues that are most material to their business and develop quantifiable metrics to measure progress. Qualitative metrics are welcome, too, but they should include specific action items if incorporated in an executive pay plan.
3. We strongly encourage using stand-alone ESG metrics, rather than embedding them in individual objectives or including them as vague modifiers. Another effective format is to accompany a financial metric with an ESG metric, with the ESG metric acting as a gateway/threshold measure for executives to qualify for STI consideration.