Fuente: PwC Governance Insights Center

Autores: Maria Castañón Moats, Leah Malone & Chris Hamilton

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Purpose driven leadership: the evolving role of ESG metrics in executive compensation plans

Environmental, social, and governance (ESG) issues are undeniably making their way onto corporate boardroom agendas today. Many large institutional shareholders are  asking companies to focus more, do more, and disclose more about ESG efforts.

ESG metrics: The roadmap to readiness

Thinking through implementation

Which metrics and weighting?

Some companies are using a dozen or more different types of ESG metrics in their compensation plans. Which metrics are right for the company’s executive team will depend on a number of factors. Currently, the most common types of metrics relate to human capital management and social issues. Among the S&P 500 companies that use ESG metrics, 41% use some kind of human capital-related metric, with diversity and inclusion (D&I) metrics being most common. Only 14% are using one or more environmental-based metric.

What could go wrong?

For boards and compensation committees thinking about adding new metrics to compensation plans, it’s important to consider the risks associated with those changes.

  • Incentivizing the wrong behaviors:

    Setting targets and establishing metrics sets expectations for executives. But with brand new types of metrics, it’s possible to discover that you’ve incentivized the wrong behavior. An executive team might be able to meet emissions goals with a big spend on a carbon sink, for example, or meet D&I goals with a short-term hiring blitz at the end of the year. These methods may sacrifice longterm shareholder value for the sake of hitting short-term targets.

  • Setting the wrong targets:                                                                                                                                                                                                                    New metrics can create complications just by being new. Partway into the performance period, the compensation committee may realize that the targets were too far off to be reasonable, leading the committee to want to make adjustments. Those adjustments can be hard to explain and can damage the company’s credibility with shareholders.

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