A Gunster blog reports that about half of S&P 500 companies used ESG metrics in their annual cash incentive plans last year. Based on the number of company announcements I’ve seen lately, that number is going to be a lot higher in 2021. In Europe, investors and law-makers are starting to pressure companies to add sustainability metrics to pay plans that will be submitted to votes next year.
To help you evaluate whether adding ESG metrics is the right thing to do at your company – and how to go about doing it – we just compiled an 8-page checklist. Here’s an excerpt about linking plan payouts to reliable data:
– Involve internal audit and, if necessary, external subject experts to test the data quality and controls.
– Test your compensation model rigorously – understand payouts and disclosures at various levels of achievement (or non-achievement). This includes understanding the impact of ESG metric achievements on financial and stock-based metrics and incentives.
– Don’t rely too heavily on certifications such as ISO14001. Companies expend much time and effort into obtaining certificates like these to hang on the wall. However, the value of the efforts may not be long-lasting as operational dynamics and external pressures change. ISO certifications may be better viewed as a snapshot in time, similar to other audits. “Trust but verify” is an appropriate philosophy.
For even more guidance, also check out this 4-page Pay Governance memo and 26-page PwC memo – and the other resources we’ve posted in our “Sustainability Metrics” Practice Area.
-Liz Dunshee, CompensationStandards.com March 24, 2021
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