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May 05, 2014 01:00 AM

Sustainability factors affect majority of S&P 500 executives' pay

Barry B. Burr
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    More than half of S&P 500 companies cite some environmental, safety, labor and other sustainability factors “as playing a role” in determining executive compensation, according to an analysis from GMI Ratings.

    Among companies in the S&P 500, 53.8% cited the use of at least one sustainability factor in pay decisions, according to the GMI report on its analysis, “Sustainability Metrics in Executive Pay: Short Term Focus on a Long Term Issue.”

    Only 16.3% used a specific measurable sustainability metric that would be assessed, and 9.8% had a target performance in connection with a metric.

    Among sectors, the percentage of companies citing pay factors related to sustainability metrics ranged widely. The highest were utilities at 74.2% and energy at 58.1%. The lowest were cyclical and non-cyclical consumer goods and services at 1.2% and 2.1%, respectively.

    “We found that for some companies, there may be only a small mention of a sustainability-compensation link in their proxy statement or (other) reports with little to no detail,” wrote the authors, Gary Hewitt, managing director, head of research, and Greg Ruel, senior research analyst. “However, there are also companies that tie 30% to 40% of a CEO's annual bonus to sustainability targets.”

    Companies “rarely incorporate (sustainability) metrics into long-term incentive plans, although many investors consider sustainability issues inherently long term,” Messrs. Hewitt and Ruel wrote. “In addition, the effects of these pay plans on sustainability performance may be limited because the metrics used often focus primarily on avoidance of errors, such as worker injuries and fatalities or environmental spills. It is much less common for companies to tie pay to systematic improvements (e.g., a reduction in greenhouse gas emissions or decreased water usage).”

    Health and safety together, at 71.6%, was the most frequently cited metric among companies that use them, while environmental issues was cited only 17.5%.

    “Investors have increasingly focused their attention on how environmental and social issues affect the long-term sustainability of a firm's financial performance,” the authors wrote.

    “By paying, at least in part, based on performance on achievement of goals such as worker safety, regulatory compliance, and environmental management, boards of directors hope to focus their executives on managing these financial and reputational risks.”

    In recognition of such concerns, “more than half of the S&P 500 now cites some sustainability factor as playing a role in pay decisions, suggesting that boards are taking seriously the importance of incentivizing and managing sustainability performance. However, there remains much room for improvement in the manner companies are incorporating sustainability factors into executive compensation.”

    For the analysis, “GMI Ratings examined the most recent annual proxy statements for companies indexed in the S&P 500,” reviewing “each company's 'compensation discussion and analysis' section … for all mentions of sustainability metrics and any ties to executive pay,” the report states.

    Governance Holdings' GMI Ratings specializes in providing research and ratings on environmental, social, governance and accounting-related risks affecting the performance of companies.

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