The Advisors' Blog

Debevoise recently studied the use of ESG metrics in incentive plans by the 100 largest public companies — finding that they were used by 71% of that group (most of which used more than one), and 7% took ESG factors into account in setting compensation. Here are a few interesting takeaways:

– Despite the long-term nature of ESG considerations, they remain popular primarily in annual plans. 65% included them only in annual plans, while 4% included in both annual and LTI plans and no companies included them only in LTI compensation. 2% included them in a special bonus program.

– Social goals remained the most common (68%), with the most popular metrics related to DEI (51%). The article notes that the impact of the Students for Fair Admissions cases was not yet reflected in the 2024 proxy season, given the timing of the opinion (released after most 2023 compensation decisions).

The article makes a few predictions for next proxy season and beyond:

– Companies have revisited DEI metrics after the U.S. Supreme Court’s opinion last year in the Students for Fair Admissions cases. We have seen some companies making changes to DEI goals or the disclosure related to such goals, especially where such goals are quantitative representation goals that may result in a higher litigation risk. We have seen other companies remove DEI goals from their incentive compensation plans. However, we have not seen and do not expect to see most companies walking away from DEI goals altogether given the importance of these goals to workforce strategies and long-term business performance.

– With respect to other ESG-related metrics, we expect companies will continue moving toward quantitative goals and away from qualitative or discretionary measures in the face of investor and institutional shareholder demands.

– We expect to see more specificity around ESG goals in incentive plans, rather than broad or general measures. We also expect that even more companies will use stand-alone weighted ESG metrics rather than scorecards where ESG measures have no defined weighting.

– Finally, we anticipate that more companies will begin to include ESG goals in their long-term incentive plans to align with the inherently long-term nature of their ESG strategy, recognizing that some of these metrics are less suited for short-term objectives.

– Meredith Ervine