Whether it’s because of company focus on external stakeholders or pressure from activist investors, we’ve already seen a large increase in companies including ESG metrics in their incentive plans.
ESG embraces a diverse range of issues and how they are incorporated in incentive plans varies greatly not only in how they are measured but, as importantly, what is measured and how much it influences actual payouts.
For example, Environmental criteria may include meeting carbon footprint reduction targets and or increasing the percentage of renewable energy used by the organization.
Societal areas could include support for disadvantaged school systems or support for specific programs such as Science Technology Engineering and Math (STEM).
Governance can focus on a variety of areas from fostering an open culture to setting the highest standards for professional integrity which might include Diversity, Equity, and Inclusion (DE&I) objectives.
Indeed, according to Harvard Law Review, among the S&P 500 companies filing proxy statements between January and March of 2021, there was a 19% increase of companies including a DE&I metric over the prior year.
The point here is that, under the ESG umbrella, companies are still trying to figure out what is important to their shareholders and what should be (can be) measured and included as incentive metrics.
The U.S. Securities and Exchange Commission (SEC) has recently introduced new disclosure requirements designed to provide stakeholders insight into an organizations HCM – from the operating model and talent planning practices through to the employee experience and work environment.
As with many other historical disclosure requirements, it is to be expected that companies will begin to mirror their HCM disclosures with some metrics included in incentive programs.
At the risk of being dilutive to other metrics incorporated into incentive plans, it can be expected that the ESG metrics will likely start to include some metrics related to their HCM.
For example, as part of an organization’s DE&I objectives, the attraction, retention, training, and promotion of diverse employees becomes a standard for measurement with incentive dollars tied to it.
Without doubt, this year’s executive compensation discussions will have the usual focus on pay for performance.
What will be different this year, however, is that while the economy was beginning to turn around, there are some significant headwinds companies are facing.
Talent shortages continue to be a critical business matter directly affecting companies’ ability to effectively serve their customers and to grow profitably.
And a significant downturn in the stock market has impacted shareholders’ perspective of company performance.
It has also adversely affected executive compensation currency since most long-term incentives are paid in the form of stock and/or stock options which now may be underwater.
How companies deal with these matters will shape how their programs are perceived both internally and externally.
It is always important to remember, whether it is a closely held family-owned business or a Fortune 100 publicly traded company, executive compensation is one of the most impactful communication vehicles a company has.
Through these programs, a company communicates what is important, how they define success, and how they value success (or lack of).
This year will be different in that people will be looking forward to the post-pandemic world, judging how the company has acted during the pandemic, and trying to assess the potential impact of the war in Ukraine.
Extra prudence is advised.