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The ESG Review: Linking executive pay to ESG performance

In this thick of earnings season, as companies grapple with announcing their annual results after the already well-documented and unprecedented challenges of 2021, executive pay is never too far from the headlines.

And this week, a couple of those stories have turned to how ESG performance is beginning to be linked to how business leaders are compensated - perhaps not overall performance across all relevant criteria, but pegged to certain initiatives or targets.

It’s easy to say that for more progressive companies, the success - or otherwise - of the CEO in pursuing purpose-led goals has long been a factor in their reward package. But as a piece in the Financial Times set out, mechanisms seem to be becoming more formalised.

It outlined how Starbucks has joined Apple and Disney, in this case in tying a portion of the CEO’s bonus to methane and plastic straw reduction, and that 20 per cent of executive pay is now tied in some way to “corporate social responsibility”.

But as the piece pointed out: “ESG pay provisions tend to be vague, and asset managers expressed concerns that if ESG pay replaces bonus targets tied to share price performance, then executives could be insulating bonuses during a turbulent stock market this year.”

It throws into question again the level of rigour applied to measuring progress against ESG goals and the methods adopted for doing so.

A couple of days later, another FT piece covered Allianz Global Investors stating that it will vote against large European companies in its portfolio that have not inked executive pay to ESG targets.

According to PwC a few months ago, almost 60% of FTSE 100 companies now include ESG measures as part of their executive incentive plans.

Pointed remarks about executive pay and a sense that investors are increasingly keeping their elbows out as they lean on companies to better justify bonuses with measures beyond financial performance are not a new phenomenon at this time of year.

But the application of more rigid criteria that are tied to certain chunks of pay packets is new, although it doesn’t sit so easily alongside other ESG headlines in recent days cautioning about greenwashing and the ESG bubble bursting. In fact this FT long-read piece pointed to a potential “mis-selling scandal”.

And a survey story carried by Edie raised the interesting point that businesses’ biggest ESG data gaps include accessing information from the supply chain and from employees working remotely. In other words, even if clear frameworks and standards for assessing progress against goals are in place, recent disruption and shifts are making it harder to assemble accurate information.

It all points to executive pay being in sharper focus and requiring a more evidence-based approach to the size of awards than ever, but that evidence becoming harder to come by - and perhaps more difficult to convince stakeholders of - in these times.

The devil of leadership pay may lie in the detail, but now also in the data.

The ESG News Review is written by Steve Earl, a Partner at BOLDT

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