More companies are tying executive compensation to sustainability metrics despite ESG backlash, according to a report by compensation consultant Farient Advisors.
“Companies are aware of an ESG backlash in the U.S., but maintain their focus on long-term value drivers, which often are inextricably tied to ESG factors,” said the report, 2024 Global Trends in Stakeholder Incentives: What’s Next?
With ESG established as a strategic value driver for companies of all sizes and sectors, the organizations “are stepping up to navigate these crosscurrents and amplify performance and the value of their sustainability efforts,” Robin A. Ferracone, CEO of Farient, said in the report’s introduction.
For the fourth annual study of executive compensation practices and ESG incentives, Farient and the Global Governance and Executive Compensation Group looked at more than 500 companies of all sizes in Australia, Canada, continental Europe, Singapore, South Africa, the U.K. and the U.S., based on the most recent public disclosures.
Nearly 90% of large companies globally now incorporate ESG measures into their incentive plans, with the steepest increases in ESG incentive adoption in Canada, Singapore, South Africa and the U.S., the report said.
In the U.S., 78% of S&P 100 companies now use at least one ESG incentive measure in either their short-term or long-term plans, and companies of all sizes and sectors “are refining their ESG strategies in an ongoing pursuit of longer-term stakeholder value,” the report said.
Boards and management are revisiting measures and goals to ensure alignment with strategies, “and they are increasingly focusing on the measures that they consider to be true long-term value drivers, such as greater workforce diversity and emissions reduction,” it said, with more time and resources being invested to quantify the financial and social value of meeting ESG goals.
The increased use of ESG metrics in compensation across sectors and company sizes was particularly notable when it comes to carbon emissions. The use of environmental measures in incentives increased to 61% globally last year. In the U.S., 52% of large-cap companies now use environmental incentive measures, up from 34% in 2021 and 8% in 2020.
The study also found that most ESG goals are currently benchmarked against internal objectives by companies, but it predicts that other goals will come as ESG data becomes more comparable and transparent. Along with case studies, the report shows how some companies continue to align executive compensation with ESG performance measures.
