More on “ESG & Compensation Plans: Proceed with Caution”
Recently, I wrote about how some say ‘proceed with caution’ when preparing to integrate ESG with incentive plans. There’s a helpful Sullivan & Cromwell memo that discusses legal and business issues associated with introducing ESG metrics into executive compensation determinations.
Calls for linking ESG targets with executive compensation aren’t new, and they’re not slowing down. Despite citing examples of companies that have taken steps to link ESG metrics with executive compensation as including, among others, Royal Dutch Shell, Clorox, Intel and PepsiCo, the memo says doing so is far from mainstream.
If you’re considering linking ESG metrics to executive compensation, it’s helpful to be aware of some of the challenges discussed in the memo:
– Deciding which metrics to benchmark is difficult – internal measures are hard to compare against peers and third-party standards might not be calibrated appropriately for specific industries
– Doing so will include deciding the frequency of disclosing ESG performance to the market and the related feasibility and cost of internal reporting processes
– Care must be taken to avoid unintended consequences – for example, pursuing certain ESG metrics could create conflicts between various stakeholders
-Lynn Jokela, CompensationStandards.com May 4, 2020
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