Tara Tays is a Partner, Phil Johnson is a Senior Consultant at Pay Governance, and Ashley Gamarra is Head of Marketing at SustainaBase. This post is based on their Pay Governance memorandum.
Introduction
In recent years, global companies have grappled with defining a baseline for environmental metrics, establishing the processes and controls to measure and report progress toward objectives, and setting the goals of ambitious environmental performance metrics (especially if environmental performance metrics are used in executive incentive arrangements). Institutional investors have also been increasingly seeking ways to ensure that the companies in which they invest are actively working towards a sustainable future. In response to these investors pushing for progress on sustainability (among other priorities), the majority of S&P 500 companies have released sustainability reports, and boards of directors, compensation committees, and management teams have been discussing whether a portion of executives’ incentive compensation programs should be tied to corporate sustainability priorities.
From setting greenhouse gas (GHG) emissions reduction targets to promoting circular economy practices (which involve minimizing waste and maximizing the reuse and recycling of resources), some compensation committees have considered if there are specific and actionable performance metrics that should be included in executive incentive plans. Whether environmental incentive metrics will support meaningful sustainability progress depends on how the metrics are created, measured, and evaluated.
In this article, we explore the role “E” in Environmental, Social, and Governance (ESG) priorities has played in executive incentive arrangements, as well as design considerations for including an “E” metric in executive incentive plans.
