Large US companies are increasingly linking executive compensation to some form of ESG performance, with the share growing from 66 percent in 2020 to 73 percent in 2021. At the same time, just a minority of polled corporate executives say including ESG (environmental, social, and governance) performance goals in executive pay is very important in achieving their ESG goals. Most view such measures as being of medium importance, which indicates that incorporating ESG measures into compensation is just part of companies’ broader efforts to achieve their objectives.
The findings come from a new report by The Conference Board, produced in collaboration with Semler Brossy and ESG data analytics firm ESGAUGE. The study includes various trends—and highlights lessons learned—relating to companies tying executive pay to ESG performance.
In addition to the analysis showing an overall increase in the adoption of such goals, some ESG topics have gained considerably more traction than others: From 2020 to 2021, the share of S&P 500 companies incorporating DE&I (diversity, equity and inclusion) goals in executive compensation grew from 35 percent to 51 percent. And carbon footprint and emission goals nearly doubled, increasing from 10 percent to 19 percent.
To understand the opportunities and challenges companies have in implementing ESG performance goals in executive compensation programs, The Conference Board convened a roundtable with executives in compensation, ESG, governance, and sustainability. Participants said the top reason to link executive pay to ESG performance goals is signaling ESG as a priority, followed by responding to investor expectations. The top two reasons for not tying executive compensation to ESG is the challenge of defining specific goals, followed by skepticism about their effectiveness.
“Companies should consider using ESG operating goals for one to two years before including them in compensation,” said Merel Spierings, author of the report and Researcher at The Conference Board ESG Center. “That allows time to see if those goals are truly relevant for the business and develop strong buy-in from management and employees. It is especially important for companies to both validate and broadly communicate ESG goals before rolling them out as part of compensation plans for a broader management or employee base.”
