US firms tie ESG to executive pay

US companies are increasingly tying ESG to executive pay – a move that, despite widespread ESG backlash, signals a continuing broad acceptance of the movement among the corporate elite.

The news comes from the global law firm Shearman & Sterling. In their latest Corporate Governance and Executive Survey – its 20th overall – it revealed that an increasing number of America’s biggest organisations are tying ESG progress to how much its executives get paid. 

In addition, the survey also found a growing appetite for:

• Diversity and inclusion disclosures, although considerable variation remains. 
• Recruitment and retention
• Cybersecurity

Read on for a full roundup of the report’s most important findings.

“Much has changed since we began chronicling developments in corporate governance and executive compensation matters,” Shearman and Sterling said in the report’s introduction. 

It hailed the transformation over the last two decades, which saw the development of boards as independent thought leaders rather than rubber-stamp committees. 

Increasingly, they are now “a check against management entrenchment and the risk of the ‘imperial’ CEO,” the firm said. 

And with these changes ongoing, governance has begun to embrace more rounded ideals like ESG (environmental, social and governance) and D&I (diversity and inclusion) – in practice, not just on paper.

“More than half (60%) of surveyed companies incorporated ESG metrics into their executive compensation programs,” Shearman and Sterling summarised. 

This is an increase of 19% from the previous year, and mirrors a similar trend in the UK and EU. 

Tying ESG progress to executive pay is an established incentive. It’s designed to motivate company leaders to turn principles into practice. Recently, the main question around this tactic is not whether it works but how many companies actually use it, especially the big global players. 

But, as is common with ESG, criticism persists because of unclear metrics. 

In fact, this report has found that as compensation-ESG ties continue to increase, so too does stakeholder dissatisfaction. 

“The ESG metrics that companies link to compensation are often criticised as being overly broad, vague and qualitative,” the report said, “making it challenging to assess how and why the metrics were chosen and weighted.”

This persistent problem with ESG is plaguing everything from company strategies to international legislation (for example, the teething issues with Europe’s SFDR regulations). 

For now, don’t expect a quick fix on this issue.

Organisations are ramping up their efforts in this area, but not consistently. 

“Companies vary considerably in how they present information regarding board diversity in their proxy statements,” the report said. However, it noted a general increase in transparency and commitment to top-level diversity. 

It found that: 

• 43 of the top 100 companies now reported on board diversity with a director-specific lens – up from 26 last time. 
• 71 of the top 100 companies had more than 30% female representation on boards – up from 58 last time. 
• 15 of the top 100 companies now have boards chaired by women – up from 6 last time.

These were other top-line conclusions drawn in this year’s report, which found that:

• Nearly 75% of the top 100 companies now disclose information on recruitment practices. 
• Around 60% now disclose information on retention rates
• 56% have directors with specific cybersecurity or data experience.

With their focus on the US, Shearman and Sterling keep a close eye on the Securities and Exchange Commission (SEC), America’s market watchdog. 

The report warned that the SEC has been “extremely active” in proposing new disclosure rules in the last year. These proposals are laying the groundwork for more reflection, administration and communication hurdles that companies will have to face – perhaps sooner than they think. 

“The climate-related disclosures, in particular, are among the most comprehensive and prescriptive rules the SEC has proposed in recent memory,” the report said, noting that they would cause “unique and challenging issues” for companies going forward. 

Stakeholders’ eyes will likely continue to monitor the SEC’s actions as it begins to formalise reporting in many areas for the first time.