ESG Metrics in Incentive Compensation

Pay Governance has a new report on ESG metrics in incentive compensation. The full report is below. Highlights:

In 2020, 22% of survey respondent companies indicated they included ESG metrics in their incentive compensation plans; for 2021, 29% of companies reported they have incorporated ESG metrics in their incentive plans while 21% of companies indicated they were still uncertain if ESG metrics would be included in 2021 incentive compensation. This finding suggests companies are still hesitant to include ESG metrics in incentive compensation programs despite considerable social and investor support for the subject. Some of the hesitancy may be due to companies’ ability to accurately capture and report the data, establish appropriate targets for each metric and concerns over the potential fallout if ESG targets are not attained.

The weighting of ESG metrics contemplated for 2021 incentive plans is typically less than 25%. In general, most companies tend to weight non- financial measures less than 25%. Given the lack of experience some companies have in using ESG metrics in incentive plans, many are taking a conservative approach in weighting ESG metrics.

The most common ESG category was social, with 84% of companies including
a social metric in 2020 incentive plans and 87% in 2021 incentive plans. The prevalence of the environmental category increased significantly in 2021 with 63% of companies including environmental metrics in incentive compensation — up from 44% in 2020 — reflecting, in part, significant investor interest in environmental issues.

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