U.S. employers poised to expand ESG measures in executive pay plans

ARLINGTON, VA January 26, 2022 — U.S. public companies are embracing environmental, social and governance (ESG) measures for executive pay programs, with a notable increase in the use of HR metrics, employee health and safety, and inclusion and diversity (I&D) measures. That’s according to a new report by WTW (Willis Towers Watson, NASDAQ: WTW), a leading global advisory, broking and solutions company.

“Faced with mounting shareholder concerns, a slew of companies have been announcing goals linked to achieving ESG initiatives, such as net-zero carbon emission commitments or inclusion and diversity recruitment goals,” said Don Delves, North America practice leader, Executive Compensation and Board Advisory, WTW. “The push to link ESG measures with incentive pay plans signals the increased importance of these initiatives as part of broader efforts related to risk management, brand value enhancement, and recruiting and retention.”

The WTW 2021 Global ESG Report reveals that 60% of S&P 500 companies incorporated ESG metrics in their incentive plans in 2020, an increase from 52% the previous year. ESG metrics are much more common in short-term incentive plans (59%) than long-term incentive plans (5%), although their use in both plans have been increasing modestly. Over half of companies (56%) report they use social metrics, followed by governance (30%) and environmental (13%) metrics.

While metrics are increasing in all ESG categories, the report shows that the increases are especially noteworthy in HR metrics (up nine percentage points); employee health and safety (up five percentage points); and diversity, equity and inclusion (up four percentage points). A closer look at these categories reveals the following:

People and HR: People and HR metrics are the most prevalent of the six ESG categories of companies, with 40% of companies having a people and HR goal. Nearly three-quarters are classified as being part of broad metric bundles. Most (66%) fall within individual performance.

Environmental and sustainability: Two-thirds (66%) of companies using environmental metrics do so quantitatively. Of these, 51% are stand-alone metrics, while the remaining are split relatively evenly between an ESG bundle or broad bundle. Metrics like emissions, incidents and waste have goals that can be defined, are understandable and easily measured.

Inclusion and diversity: One in five companies (19%) with an I&D metric are measuring it quantitatively. Nearly half (46%) set objectives at the corporate or business unit level, and the majority (56%) set them at the individual performance level.

“We anticipate companies will continue to increase the use of ESG metrics. In fact, more than 50 companies indicated they would add at least one new or amended ESG measure to their annual or long-term incentive programs or boost the ESG weighting of their existing program in 2021. Inclusion and diversity is one area where most companies are considering adding or enhancing an ESG measure,” said Delves.

The study also examined the use of ESG metrics among employers in Canada and throughout Europe. The findings include:

• Canada experienced the largest increase in the number of companies using ESG measures, increasing to 77% in 2020 from 68% in the prior year. In Europe, the use of ESG measures in incentive plans increased from 75% to 79%.
• Nearly four in 10 European companies (39%) indicated they planned to introduce, expand or modify ESG metrics in their programs. Only two in 10 Canadian companies (22%) plan to do so.
• Social metrics are most commonly used among Canadian employers (73%) followed by European companies (69%). Governance metrics are most commonly used at European companies (56%) followed by Canadian companies (45%). Environmental metrics are also most commonly used by European companies (38%) followed by Canadian companies (25%).

About the study

The WTW 2021 Global ESG Report provides an analysis of ESG metrics used in executive incentive plans as disclosed for the top companies in the United States (S&P 500), Canada (TSX 60) and Europe (327 companies from nine regional stock market indices) during the financial year 2020 – 2021. The report, completed by WTW’s Global Executive Compensation Analysis Team, includes a summary of how ESG metrics are incorporated into incentive programs among six key categories: environmental and sustainability, people and HR, inclusion and diversity, employee health and safety, customer service and governance.

About WTW

At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.

Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you.