Many companies have been shifting the focus to sustainability practices, and one way to prove that is by tying executive’s paychecks to environmental, social, and governance (ESG) performance.
Key Details
- More companies have been shifting focus to a bigger picture and changing business practices to match.
- A large number of S&P 500 companies are paying executives based on some form of ESG performance.
- In 2021, 73% of companies began linking pay to ESG performance marking a big jump from 66% in 2020, according to the Conference Board analysis.
Why it’s news
Many large businesses have been shifting company focus to ESG related issues to help build a better business.
In order to drive home the importance of these topics many S&P 500 companies have begun tying executive pay to ESG performance.
Two of the biggest focuses have been with diversity and climate change. The biggest increase has been in companies’ use of diversity, equity & inclusion (DEI) goals, rising from 35% in 2020 to 51% in 2021, according to the Conference Board analysis.
The number of S&P 500 companies that tied climate change goals to executive pay also went up considerably, from 10% in 2020 to 19% in 2021.
The analysis found that the main reason these companies have been tying ESG performance to executive pay is to instill in the company how important these ESG goals are. If the highest paid people in the company are being affected by these goals, then it must be really important.
Concerns
Many concerns have been raised with the act of tying executive pay to ESG goals.
Some concerns lie in the fact that some ESG goals are difficult to measure. If the goals can’t adequately be measured then how is pay going to be accurate? Many think that there are other ways to instill the importance of ESG goals without affecting executive pay.
The conference board analysis says it is a good idea to consider ESG goals for two years before allowing it to affect executive pay. That allows for enough time to see if those goals are truly relevant for the business.
