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21 February 2022
ESG-linked bonuses enter corporate mainstream
SustainabilityCorporate social responsibilityTalent, skills, HR
Executive bonuses for ESG – environmental, social, and governance – performance are becoming common around the world, but vagueness and a lack of standardised metrics harbour threats to credibility.
Why it matters
The climate emergency requires action, and it's rare to see the kind of action that can come when somebody’s pay depends on it. While it’s encouraging that companies are taking these issues increasingly seriously, critics warn that broad, high-level, short-term metrics suggest more effective, long-term metrics are needed. Marketers will need to stay aware of what investors will and won’t accept, as it’s likely these decisions will define what’s considered credible reporting rather than greenwashing in future.
Spotted by the FT, which observes that an array of Corporate America’s largest denizens are including ESG in executive pay, these companies join a global list of firms taking these non-financial performance factors into account.
Per a PwC/London Business school report published last year, as many as 45% of the UK’s FTSE 100 companies include ESG.
The US lags a little, here, with a fifth of Russell 3000 companies tying executive pay to ESG and 11% tying bonuses to diversity and inclusion initiatives.
Companies like Starbucks paid out 10% of CEO Kevin Johnson’s bonus for a set of incentives based on the reduction of plastic straws and methane. However, it’s worth pointing out that this was a rethought offer following an investor revolt against a $50 million retention bonus.
Unlike financials, ESG metrics are still in a much vaguer place. Share price is easy to measure; the whole range of ESG is not. One of the problems is that some firms tie bonuses to vague ideas of applying values to operations.
As it hits the mainstream, however, company performance will likely find comparable metrics across firms. But the bottom line is that this stuff is here to stay: the CEO’s wallet depends on it.