Four in five companies to review ESG metrics for executive pay plans

Four in five organisations worldwide are planning to change how they use environmental, social and governance (ESG) metrics for their executive pay plans over the next three years.

That is according to a global survey by Willis Towers Watson (WTW), which said that COVID-19, economic uncertainties, and social and racial injustices are causing firms to put a stronger emphasis on environmental and inclusion and diversity priorities.

The survey also found that 41% of companies plan to introduce ESG measures for their long-term incentive plans over the next three years, while 37% intend to introduce ESG measures for their annual pay plans.

In addition, nearly half of respondents said that they are either planning to review their culture to ensure ESG is embedded throughout their organisations, or are considering doing so in the future.

“With investor and shareholder interest in ESG and sustainable investing increasing, companies are accelerating their focus on ESG initiatives,“ said Shai Ganu, global head of executive compensation at WTW.

“Companies' greatest focus is on a stronger alignment of executive compensation plans and ESG priorities, particularly with climate change and environmental measures, inclusion and diversity matters, and overall human capital governance.“

However, the survey also identified several difficulties that companies are facing when using ESG metrics for incentive plans.

Among the greatest challenges are target setting, performance measure identification and performance measure definition, cited by 52%, 48% and 47% of respondents respectively.

Overall, although more than eight in 10 of companies are developing ESG implementation plans, or have identified ESG priorities, less than half have incorporated these into all aspects of their businesses

“In the UK, although some companies are revising their use of ESG measures to support their executive pay programs and overall inclusion and diversity initiatives, more work needs to be done,“ said Jessica Norton, WTW's UK executive compensation practice leader.

“We expect that the level of interest and involvement of more organisations will only rise as investors, consumers and employees increasingly press companies for a strong commitment to ESG as well as hold their CEOs more accountable.“

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