While the majority of United States companies now include environmental, social and governance (ESG) measures as part of their executive compensation incentive programs, they are now poised to expand and refine the use of ESG incentive metrics in the coming year. Stakeholders have been steadfast in their desire for companies to address key ESG issues, most prominently environmental and sustainability (E&S), people and human resources (HR) and inclusion and diversity (I&D).
Key takeaways
Responding to stakeholder concerns, many companies have recently announced goals tied to achieving various ESG initiatives, such as net-zero carbon emission commitments or I&D recruitment goals. Companies have increasingly incorporated ESG-related measures tied to these goals as part of their incentive programs, signaling increased importance and consequences of these initiatives as part of broader efforts related to risk management, brand value enhancement, and recruiting and retention.
According to Willis Towers Watson’s recently published 2021 Global ESG report, (please see link below to download the report) the use of ESG metrics within incentive plans for S&P 500 companies is increasing. In fact, we are seeing measured increases across all ESG categories, but the increases are especially notable in HR metrics, which increased nine percentage points since last year, employee health and safety (up five percentage points), and inclusion and diversity (up four percentage points).
The study also found that most companies use several stand-alone ESG metrics or combine them as part of ESG or broader bundles. Only 5% of companies use a single (stand-alone) ESG metric. To the extent a distinct weight of ESG metrics could be determined (i.e., it is comprised of the stand-alone ESG metrics as well as the pure ESG bundles), 17% is the median overall ESG weighting within annual incentive programs.
Drilling a bit deeper into some of the key ESG issues emerging this year:
People and HR metrics are the most prevalent of the six ESG categories within incentive plans for S&P 500 companies, with 60% of companies having a people and HR goal.
We anticipate continued focus and increased use of ESG metrics by companies in the year ahead. There are 57 companies that have already indicated they will be adding at least one new or amended ESG metric to their annual or long-term incentive programs or increase the total ESG weighting of their existing program this year or early next year.
Inclusion and diversity is the area where most companies are considering adding or enhancing an ESG measure — usually in the form of a stand-alone metric or modifier — followed by environmental metrics. We expect several more companies will reveal new or enhanced ESG metric use when the full picture of 2021 actions are disclosed in 2022.
A version of this article appeared in Workspan Daily on December 16, 2021. All rights reserved, reprinted with permission.
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2021 Report on ESG metrics in executive incentive plans | .7 MB |