3 in 5 employers globally apply ESG targets to share-based compensation, finds report
Six in 10 (60 per cent) companies around the world now apply environmental, social and governance (ESG) targets to share-based employee compensation – but most employers remain short-sighted, finds a new report.
Over eight in 10 (84 per cent) say they apply them to the management board.
The same percentage of companies tying pay to ESG targets was also reported in a previous study.
Institutional investors and proxy advisors have a significant influence on responding companies’ ESG targets, 62 per cent saying that they have a medium-to-high influence, reports GEO.
“More and more companies worldwide are working hard to figure out how they can best embed ESG principles into employee compensation, including employee equity plans,” says Sheila Frierson, president, Plan Managers NA at Computershare, one of the report’s sponsors.
“Companies will aim to implement systems that best align the goals of the company, such as reducing their environmental imprint or increasing employee diversity.”
What are the ESG-based compensation targets?
Over eight in 10 (84 per cent) companies say they have applied targets related to reducing CO2 such emissions.
Other targets include:
- Employee diversity (40 per cent)
- Corporate governance targets for ESG instruments (39 per cent)
- Stakeholder relationships (28 per cent)
- Reduction of accidents (22 per cent)
- Sustainable supply chains (17 per cent)
However, less than two in five (38 per cent) companies publish ESG reporting information within the annual report.
Tying executive pay to ESG performance is now an established practice across Canada and the United States – but there are still many questions involved, according to one expert.
Linking ESG performance to financial performance
Despite the popularity of this idea, 40 per cent of companies that report that they use ESG targets say they apply them to short-term incentive plans (STIs), which companies are increasingly offering to a wider range of employees to secure talent and lock in innovation.
Meanwhile, just 30 per cent say they apply ESG to long-term incentive plans (LTIs), which are typically used to incentivize executives.
Just 18 per cent of employers are applying ESG targets to both plan types, while 13 per cent say that, although they don’t currently use ESG targets, they are considering introducing them.
About a third (32 per cent) still don’t report on ESG topics in relation to LTIs.
“Low performing” companies are more likely to only apply ESG targets to their LTIs than high performers: 20 per cent of low performers say they had compared with just 11 per cent of “high performing companies”.
Workers see opportunities for improvement on employers’ ESG efforts, according to a previous report.
