The Advisors' Blog

A majority of big companies now include some type of ESG metric in their executive pay program. The jury is still out on whether that’s a good thing. One view is that “what gets measured gets managed” – so incorporating ESG goals into incentive plans shows that the company is serious about progress. At the same time, some people think that the real winners here will always be highly paid executives. Investors aren’t a monolith – they fall in both of these camps.

A recent Pay Governance memo says that the concern about using ESG incentives to improperly reward executives might be overblown – at least based on current data. Ira Kay, Mike Kesner and Joadi Oglesby looked at S&P 500 data to test the theory, and here’s what they found:

1. ESG reduced the overall payout at 75% of the companies using a weighted metric, with the median reduction equal to 9%.

2. Most ESG-weighted metric companies (56%) used a 20% weighting or less.

a. In some cases, the company used a scorecard approach and did not provide sufficient detail to determine the portion of the weighted metric attributable to ESG; in those cases, we included the entire weighting.

b. Many of the companies with a >20% weighting included ESG and other strategic metrics.

3. Of the companies that incorporated ESG metrics as part of a modifier, 33% increased payouts and the remaining 67% had no effect or reduced payouts.

4, The average impact on payouts for companies using a modifier on the financial performance metrics ranged from +35% to -14% and averaged +2%.

5. These findings indicate that the compensation committee members are acting conservatively in setting and scoring ESG goals — thus the narrow band around target for most companies.

The Pay Governance team notes that it’s still early days here – but ESG incentive criticism isn’t supported by current data. Visit our “Sustainability Metrics” Practice Area for analysis of ESG executive pay trends – including our checklist.

– Liz Dunshee