At the Harvard Law School Forum on Corporate Governance and Financial Regulation, Don Delves, Robert Newbury, Ryan Resch, of compensation consultants Willis Towers Watson write about efforts to factor in ESG goals in incentive compensation. Since we have said that our evaluation of the new focus on stakeholders will depend in part on how pay is structured, this is of particular interest.
Environmental, social and governance (ESG) issues are increasingly important to boards and their compensation committees, especially human capital management, as a critical part of the “S” in ESG.
Compensation committees realize it directly relates to their mission, long-term strategy and success, and they’re being more proactive.
Here are three recent examples. We chose to not identify two of the companies.
At Royal Dutch Shell plc., the company committed to use ESG as an executive compensation performance measure in an effort to reduce its net carbon footprint 20% by 2035 and 50% by 2050. Executives’ pay will be linked, in part, to this target, through an energy transition measure within their 2019 long-term incentive award.
Board members of a power generation company asked for more insights after a social responsibility report found a gender pay gap existed based on the ratio of average female pay to average male pay. The analysis examined demographics by level, pay gaps by level and job family, and promotion and pay increase trends by gender. Findings reinforced that the company was paying men and women in jobs of equal value at similar levels. However, the check also uncovered that more men worked at higher levels of the organization, and an inclusion and diversity strategy was needed to encourage a better gender balance at all levels of the organization.
An integrated oil and gas company wanted better insights on key human capital metrics in support of the organization’s people strategy so management proposed a series of measures in a dashboard that could be updated quarterly for review at each committee meeting (e.g., demo-graphics, promotion/turnover rates, talent pipeline, wellness, safety and productivity/ returns. The dashboard for the compensation committee provides greater context for each performance measure (i.e., historical trends and/or relative benchmarking against other organizations) and includes a mixture of leading and lagging indicators.
It is interesting that the authors recommend changes to the corporate charter to provide a framework for ESG goals. Our view, of course, is that ESG furthers shareholder value, so that should not be necessary.