WTW published an analysis of ESG metrics in executive comp – ESG metrics and executive pay: A comparative analysis of payouts. The research has a great deal of information and insights and, for any company using ESG metrics in executive compensation, is very much worth reading.
“On the surface, ESG executive incentive payouts seem to be in line with financial metrics, but a nuanced — and different — picture emerges when you look closely at specific metrics.”
A few of the most interesting points from the research:
“the potential value of ESG metrics in incentive plans in driving company performance is contingent on these metrics being effectively designed…
Qualitative ESG metrics tend to yield higher STI [short term incentive] payouts compared to quantitative ESG metrics. This could raise questions about the objectivity of these qualitative measures… investor expectation is that these metrics are designed to be as measurable as possible as well as accompanied by robust governance and disclosure, given that they generally rely more on the remuneration committee’s judgment and discretionary assessment.
… social and governance metrics tend to be qualitative measures more often than environmental metrics
… climate metrics generally yield higher payouts than financial metrics, with the exception of LTI [long term incentive] plans in North America. Several factors may explain the higher payouts for climate metrics:
– Companies may be focusing more on and, therefore, making relatively better progress on climate transition strategies than other sustainability goals.
– Companies may set conservative targets to balance ambition and motivation for the broader population covered by the incentive plan.
– Companies may find target setting challenging due to imperfect GHG emissions measurement (data and tracking).
– There may be easier gains at the beginning of the emissions reduction trajectory…
Divergent and sometimes politicized views on sustainability matters and net zero may mean that North American companies and their executives are less clear about and committed to climate transition action than European companies, which have clearer policy and investment signals around which to ground their commitment.”
Summing it all up: “variation across metric types, particularly between those that are more qualitatively versus quantitatively assessed, highlights the need for clarity, measurability and a tight alignment with material strategic objectives.”
Ambiguous, soft qualitative ESG metrics are easy to achieve, but investors and boards may be catching on.
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