Move over earnings per share. Board directors are now under greater pressure to consider issues from climate change to diversity when deciding on the size of bonuses for company chiefs.
The number of companies globally that include environmental or social metrics when deciding executive pay awards has doubled since 2018, with about a fifth of 6,500 businesses examined now considering these factors, according to the latest annual report from ISS ESG, the responsible investment arm of Institutional Shareholder Services.
Executive pay awards have traditionally focused on financial metrics, such as earnings per share, share price performance or revenue growth. But the inclusion of non-traditional metrics for pay comes as investors, politicians and the wider public pile pressure on companies to consider their wider societal impact, particularly since the pandemic started and the Black Lives Matters protests last year.
Bonnie Saynay, global head of environmental, social and governance research at ISS ESG, said the rapid inclusion of the new metrics was striking.
“[It is] driven by companies recognising the need to adopt metrics aligned with sustainability strategies to drive financial performance and in response to increased investor engagement focus,” she said.
Asset managers have rushed into sustainable investing in recent years, believing companies that are better prepared for the energy transition or have a more diverse workforce will perform better.
“Part of the research due diligence that fund managers are now doing is digging into the compensation plans of management teams and seeing how they are aligned with the core values of ESG,” Saynay said.
Amundi, Europe’s largest asset manager, is among the big investors calling for companies to incorporate environmental, social and governance factors into executive pay awards.
“We expect executive compensation to be in line with performance trends, at an acceptable level with regard to market benchmarks, and fully integrating specific ESG objectives,” said Jean-Jacques Barbéris who oversees the ESG business at the €1.7tn asset manager.
“We will ask the compensation package to be partially based on ESG factors relevant to the company situation, both for long-term incentive compensation and short-term incentive compensation schemes.”
Amundi said this would better align “the interests of the top managers with the long-term benefit of the company and its shareholders”.
Of the nearly 2,000 companies ISS ESG examined that included environmental and social metrics, more than 90 per cent were in short-term remuneration plans such as the annual bonus. About 12 per cent included them in long-term incentive plans, with climate change being the issue most likely to feature in such schemes.
According to ISS ESG, companies such as Microsoft included diversity as a metric for executive pay, while food group Nestlé factored in staff health and safety in remuneration. Others such as BHP included climate change and energy usage.
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A separate PwC poll of 50 companies, mostly public, found that three quarters of those surveyed were considering using ESG targets in their executive pay plans or would strengthen their current approach.
Phillippa O’Connor, reward and employment leader at PwC, said many companies have talked about ESG measures in executive pay “for some time” but it has tended to form “only a very modest part of the bonus decision”.
“We’re now seeing a rapid expansion of the environmental and social targets in a more significant way across both the bonus and long-term incentive thinking,” she added.
“This is no surprise given the investor focus on ESG practices within businesses,” she said. “The noise isn’t going away.”
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