June 29, 2022 Executive Compensation ESG & Human Capital Management Articles

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Factors Affecting ESG Metric Selection For short- and long-term incentive plans

While there is building momentum to adopt ESG related incentive metrics, it is important to consider the company’s specific business and talent requirements before doing so. We encourage companies to consider three factors:

1. Does an ESG metric need to be incorporated in pay to reinforce critical priorities?

Many large companies already have a culture and/or system separate from compensation that reinforces the importance of ESG progress (e.g., external disclosures and internal dashboards) and may be sufficient to drive the desired progress. For others, compensation might be important for signaling priorities and establishing accountability – perhaps in response to external pressure from a particular stakeholder constituency. In this case, adopting an ESG related incentive metric can have an outsized influence on driving the desired behaviors. 

2. What objective would the company achieve with an ESG metric?

For many companies, meaningful ESG progress is an important priority but subordinate to pressing financial and operational goals. In these cases, an ESG metric may still help energize the culture around ESG but would likely be best-suited to a lower prominence design (e.g., as a modifier). However, if the organization has a real “burning platform” to make progress on a given ESG metric, the company might consider a more prominent design such as a standalone, weighted metric.

The selection of a specific metric – and its use in either the short- and/or long-term incentive plan – should also squarely align with the company’s current and future priorities. Companies should avoid selecting a given metric to “follow the pack.”

3. Does the company have enough history and experience to set meaningful incentive targets?

It is important that incentive goals – ESG related or not – are durable and can withstand shifts to the business strategy. Companies that are relatively new to setting ESG related goals may consider tracking a measure through a pilot program before formally incorporating it in compensation. This approach can help identify unintended consequences and the sensitivity of key forecasting assumptions, and allows the organization to refine communications and initiatives that support the underlying priority.

View the full article as it was originally published.

Mark Emanuel

This article was originally published in Equilar C-Suite.

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