The International Corporate Governance Network recently issued a 10-page memo on integrating ESG into executive compensation plans. Consistent with what we’ve been hearing from investors, ICGN notes that the COVID-19 pandemic has the potential to re-invigorate the debate about high levels of executive pay and income inequality.
ICGN proposes key characteristics of short- and long-term pay programs that can advance sustainability initiatives, regardless of location-specific market practices or regulations. It recommends using the SASB materiality map and guidelines from the European Commission as a starting point – and suggests that LTIPs be extended to cover 5-year periods.
What may be especially helpful to companies as they prepare for proxy season disclosures and engagements is this list of sample questions that investors can ask:
- What are the top three environmental, social or governance considerations of your company?
- (How) have you engaged with key stakeholders to determine these? Who are the key stakeholders? Where is the process documented? How often is this consultation repeated?
- How many of these ESG considerations are part of the strategic outlook of the company for the next 5 years? For the next 10 years?
- Can you define opportunities for balancing long-term value creation, short-term strategic agility, and the building of stakeholder ecosystems all at the same time?
- How does the company’s mission and its board-level narrative on sustainability issues get translated into robust governance of these issues, a clear strategy, risk (and opportunity) management as well as metrics and KPIs?
- What are the company-wide KPIs related to these issues?
- Do you have along-term incentive plan in place? What are the relevant ESG-related performance metrics and gateways for these? What is the evaluation and vesting period for it?
- How you approach setting well-fitting multiyear performance targets in long-term incentives plans, in a changing – and sometimes unpredictable – world?
- Do executives have a share-ownership requirement? What multiple of their annual fixed salary is this? What’s the time-frame after their appointment that they need to reach this level? What is the holding period requirement after cessation of their executive role?
- How do you entice ownership of environmental, social and governance issues in company governance and among directors, executives and employees?
- What makes your disclosure on these issues credible and reliable?
- How are these issues integrated in the compensation packages of executives and others?
- What are your three-and five-year targets regarding integrating sustainability in the remuneration and what is the roadmap to get there?
- What help would you welcome from the investment community on this?
- Do you benchmark your current remuneration practices against peers (also in the context of the pandemic)? How do you know which peers to look at for best practice?
-Liz Dunshee, CompensationStandards.com February 23, 2021
