Now in the second year of the COVID-19 pandemic, investors are raising expectations about companies' responses to highlighted ESG issues such as diversity and, increasingly, connecting that to executive compensation.
"Compensation is the ultimate governance mechanism that we have to make sure (that) companies are doing things right," said Peter Reali, New York-based managing director and head of engagement, responsible investing for Nuveen, with $1.2 trillion in assets under management.
"ESG issues are making their way into compensation conversations because shareholder proponents want it integrated into executive compensation design, to create accountability for executing on ESG commitments" and companies' responses to COVID-19, Mr. Reali said.
Robin Ferracone is CEO of Farient Advisors LLC in Pasadena, Calif., an executive compensation and corporate governance consulting firm that helps companies, large public pension funds and mutual funds review proxies and prepare votes on executive pay packages. This year, she said, "investors are really pressuring corporates to focus on ESG" particularly as COVID-19 shifts the spotlight to stakeholder issues, including employee welfare and racial and income inequality.
"Companies are now saying this is serious, and we need to seriously ask ourselves whether we should change our compensation," said Ms. Ferracone, who sees more corporate boards and even federal and state regulators paying closer attention to executive compensation.
Measures for connecting issues like workforce diversity, gender balance pay, employee engagement and retention, or health and safety to executive compensation are just starting to develop and are "all over the map," Ms. Ferracone said. So far, those metrics tend to make up about 20% of executive bonus plans, but she anticipates that more will be included in long-term incentive packages eventually.
"When you add up the investors, the corporations, the employees and the regulators, this is really a groundswell," she said.