The Advisors' Blog

As You Sow, a well-known shareholder proponent that added a focus on executive compensation 8 years ago with its annual report on the “100 Most Overpaid CEOs”, recently published a new report that grades “pay for climate performance” – based on 2021 arrangements that were disclosed in 2022 proxy statements. It’s 38 pages and available for download on As You Sow‘s website. Here are some aspects that companies and executive compensation teams may find useful:

– Which companies are most at risk for questions about this? As You Sow analyzed the 2021 CEO compensation packages of the 47 U.S. companies included in the Climate Action 100+ (CA100+) Initiative. CA100+ is an investor-led initiative with $68 trillion in assets under management working to ensure that the world’s largest corporate GHG emitters take action to reduce emissions (see my Proxy Season Blogs on TheCorporateCounsel.net for “8 Fast Facts” about CA100+ and recent updates). As You Sow says that the CA100+ companies are responsible for 80% of corporate emissions and, thus, incentivization for emissions reduction performance in these companies is particularly timely.

– What’s the “gold standard” according to As You Sow? For this report, companies were assessed on these factors:

1. Inclusion of a climate metric in the 2021 CEO pay package, with higher grades for incentives tied to emissions reductions and alignment with 1.5° C goals;

2. Inclusion of measurable climate metric and measurable pay;

3. Inclusion of climate metric in the long-term incentive plan; and

4. Climate metrics and compensation disclosures are transparent and measurable.

– How did everyone do? The highest grade was a “B” – earned by Xcel Energy for linking CEO pay to emissions reduction performance in the long-term incentive plan, with a measurable amount of pay related to achievement of reduction goals. 15 companies have some type of climate-related incentive tied to compensation. 89% of the assessed companies received “D” or “F” grades.

Here’s more detail about metrics disclosure:

In our survey, multiple companies include “reduce emissions” as a climate “metric” without specific targets for how much emissions reduction would be required to receive a bonus. Others use “progress towards” or “demonstrate leadership to” emissions reduction without disclosed target levels. Others point to milestones achieved without having initially set measurable targets. None of the above is adequate.

Backward looking milestone reflections in support of awards given are not equivalent to pre-determined metric targets. Compensation packages should include clear disclosure – ideally in chart form – that indicates the target levels set and details the threshold, target, and maximum performance required for payout. Clear information regarding prior year achievements, a baseline time period, and linking CEO pay directly to emission reduction targets in company climate transition plans can further clarify for investors whether the metrics set adequately drive climate-related progress. Some investors vote against CEO pay packages where future financial achievement is set below the actual achievement from the prior year and this practice could beneficially extend to climate metrics.

The report points to Marathon Petroleum as a good example of payout disclosure using an ESG scorecard. However, As You Sow awarded the company only a “C-” for its efforts.

As You Sow says the report is a “first step in assessing how effectively companies are currently linking GHG emissions reduction incentives to CEO pay.” So, they left some room for improvement with these grades. The report notes that 69% of S&P 500 companies say that they are including ESG metrics in compensation packages for 2022.

Visit our “Sustainability Metrics” Practice Area for guidance on establishing and disclosing these arrangements, and tune in to our “1st Annual Practical ESG Conference” today for practical info on carbon accounting and other data control issues that can make or break a company’s ability to incorporate ESG metrics into compensation plans.

– Liz Dunshee