Perhaps one of the best ways to ensure climate transition, social engagement, equal pay, and diversity in the workplace is by linking executive compensation to tangible results. After all, they’re usually linked to profit. Why not make their pay dependent on how their firms actually perform in the ESG area?
That’s exactly what many firms have started doing. And the announcements have multiplied.
In January, Apple said that beginning in 2021, it will make executives’ yearly bonuses dependent on progress toward specific ESG metrics. The new modifier will increase or decrease bonuses by 10 percent depending on the officers’ performance regarding “Apple Values” and community involvement.
Marathon Oil announced in January that its CEO and board total compensation will be reduced by 25 percent overall and that its short-term incentive annual cash bonus scorecard has been restructured to better reflect its long-term financial and ESG targets. Those are primarily focused on five areas of value creation for shareholders: safety, environment, capital efficiency, free cash flow, and balance sheet strength. By the same token, the company eliminated all production and growth metrics from the annual bonus scorecard.
In March, Chipotle Mexican Grill introduced a new ESG metric that ties 10 percent of executive compensation to the company’s sustainability goals. The metric addresses areas such as food & animals, people, and the environment. The company said that these changes “will hold Chipotle’s executive leadership team responsible to make business decisions that cultivate a better world.”
This is part of the restaurant chain’s efforts to support smaller farms and increase its use of organic, local, and/or regeneratively grown and raised food. In addition, under its people target, Chipotle has committed to maintaining racial and gender pay equity. And for the environment, it moved up its goal to publish its scope 3 emissions report by the end of the year. The company already publishes scope 1 and 2 emissions in its annual sustainability report.
That same month, payment processor Mastercard said it will link executive compensation to the company’s ESG initiatives and to three global ESG priorities. These are carbon neutrality, financial inclusion, and gender pay parity. The incentive will reach most senior executives, EVPs, and above.
“Looking ahead, we’ll continue to do what is right – driving forward the change needed for the collective good of our business, our employees, and all our stakeholders,” wrote Mastercard CEO Michael Miebach This is what doing well by doing good is all about.”
And just recently, JetBlue added to its already vast portfolio of sustainability goals, plans to integrate ESG and Diversity, Equity and Inclusion (DEI) goals in board member selection, as well as establish ESG goals tied to senior leadership compensation by 2021.
“We’re mobilizing our senior leadership team to create a more equitable workplace that better reflects the diverse communities we serve in all aspects of our airline. To ensure our success and strengthen shareholder value, ESG metrics will be tied to compensation and goals for JetBlue’s officers and directors,” said JetBlue CEO Robin Hayes.
A recent Edelman survey of 600 institutional investors in six countries, representing a total of $20 trillion in assets, found that more investors want executive pay tied to sustainability. More than two-thirds (69%) of respondents in 2020 said that they wished for executive compensation to be tied to ESG target performance, a 17% increase from the previous year.
In addition, social issues became the most important ESG element, moving up from number three to number one in 2020. According to the survey, nine out of ten investors believe that leaders have an obligation to use their power and influence to advocate for positive change in society.
“Boards of Directors especially must get ready for direct engagement from investors on ESG matters, including climate risk, corporate culture and diversity, and inclusion, said Lex Suvanto, global managing director of financial communications at Edelman. “Also, the great majority of investors believe that a multi-stakeholder approach will deliver enhanced returns and say that companies that do this well will have a competitive edge in building trust.”