The Advisors' Blog

On Monday, I shared data showing a significant increase in use of environmental metrics in incentive plans — particularly metrics related to GHG emissions. For companies or compensation committees with FOMO, this report from Pay Governance and SustainaBase has a guide to getting started. If you’re considering integrating environmental performance metrics in an incentive plan, the report suggests first understanding the company’s readiness to measure and quantify the considered objectives & aligning with the company’s existing environmental priorities — by considering the company’s most recent E&S materiality assessment, existing internal objectives and the requirements and preferences of external stakeholders. With respect to one group of stakeholders — institutional investors and proxy advisors — the alert says:

In our experience, institutional investors and proxy advisors prefer executive incentive designs that are measurable and transparent. This includes clearly detailing the performance metrics and goals used to reward executives. Therefore, when it comes to incorporating “E” performance metrics in incentive arrangements, quantitative metrics (i.e., predefined goals are set at the beginning of the performance period and achievement against the goal at the end of the performance period determines a corresponding incentive payout) are often preferable. Additionally, as companies’ environmental reporting capabilities become more robust and automated, this may further lend itself to companies considering whether quantitative “E” performance metrics should be included in their executive incentive designs.

While quantitative metrics are generally preferred, there are situations where qualitative metrics may be more relevant. Early-stage companies at the outset of their sustainability endeavors — such as those undertaking materiality assessments, instituting sustainability teams, or identifying internal benchmarks — require a degree of flexibility. [But] even well-established companies with robust environmental strategies occasionally find qualitative metrics beneficial, particularly when taking their initiatives to the next level.

The report also emphasizes the importance of aligning metrics with any specific frameworks used by the company so that one standard (like the GHG Protocol) is used to track environmental metrics across all departments — “from finance and investor relations to sustainability and operations.”

Side note: One of the authors of the report, Tara Tays, is participating on the panel “The Top Compensation Consultants Speak” at our 2024 Proxy Disclosure & Executive Compensation Conferences this fall! Our panel has a great agenda in store for attendees and plans to discuss topics like “Measures to Fit the Moment” and “Top Executive Compensation Plan Designs that Can Push Shareholders to a Failed Say-on-Pay Vote.” Register now to attend in person at our discounted “early bird” rate!

– Meredith Ervine