Matt Turner on ESG factors in CEO pay:
Recently ESG (environmental, social, and governance) issues have gained increasing traction in corporate boardrooms. Has there been an impact on executive compensation?
Yes, in various ways, ESG issues are showing up in the performance framework of executive incentive compensation and, more broadly, in executive performance evaluation. With respect to incentive plans, ESG issues may show up as modifiers to the overall funding of executive cash incentives. Alternatively, if the specific issue can be attributed to key individuals, or component metrics of the overall goal can be identified, they may show up in the individual performance portion of an incentive plan.
How influential are ESG metrics in executive incentives?
Typically such metrics are given only modest weight in the overall incentive funding formula—something along the lines of 10-20% of the total. The modest weighting may be due to the amount of practical control and influence an executive team may have over the goal. Somewhat related, objective measurement of progress or success may be difficult, requiring subjective judgement. While the actual weight may be modest, the important thing is the signal being sent both to the executive team and the external stakeholder community about the importance of the issue.