When it comes to building environmental, social and governance (ESG) factors into executive pay deals, UK and EU companies appear to be well ahead of their US counterparts.
A survey reveals that a huge 95% of UK and EU firms include ESG metrics in compensation plans, while just 22% of US corporates do likewise.
The samples sizes are small (the survey includes 95 US companies and 30 companies selected from the FTSE 100 and STOXX 50 indices) but they go some way to indicate the relative popularity of ESG measures on either side of the Atlantic.
Published by Pay Governance, a consultant to compensation committees, the research is an attempt to gauge progress towards incorporating ESG into executive pay deals.
The survey also finds that 89% of UK and EU companies include ESG measures in annual incentives and 41% in long-term pay plans. Of the US companies deploying ESG pay arrangements, 95% had them in annual incentives while only 5% had them written into long-term arrangements.
“Thus,” concludes the Pay Governance report, “in addition to a much higher prevalence rate, UK/EU companies also had a much higher rate of inclusion in long-term incentive plans.”
Sustainability vs near-term wins
The result may reflect differences in business culture: despite the fanfare around sustainability, US corporates may still be focused on near-term wins. In the UK and EU meanwhile, there have been substantial efforts by investors and regulators to persuade companies to plan long term.
While it goes without saying that ESG is important to heading off global warming, US companies face extra pressure from plans touted by the Biden presidency to introduce mandatory ESG reporting.
Indeed, the topic has triggered an intense debate inside the US business world after Allison Herren Lee, the then acting chair of US financial regulator the Securities and Exchange Commission, said in a speech that “climate and ESG are front and centre for the SEC. We understand these issues are key to investors—and therefore key to our core mission.” The same day Lee made a request for comments on how the watchdog’s disclosure rules could “provide more consistent, comparable and reliable information”.
ESG targets in UK pay deals
Back in the UK evidence has been mounting that ESG measures have become a significant fixture of executive pay arrangements.
Research by London Business School and accountancy firm PwC reveals that 45% of the FTSE 100 include an ESG target in their executives’ annual bonuses or long-term incentive plans, or both. The average weighting of ESG targets in an annual bonus is around 15%, the researchers found, while the weighting in long-term plans is 16%. The findings also show use of long-standing ESG measures such as health and safety, risk and employee engagement, with new measures related to climate change, sustainability and diversity.
The are warnings about ESG measures in pay schemes, however. Tom Gosling, a fellow at London Business School’s Centre for Corporate Governance, says: “The increased focus on integrating ESG considerations into company strategy and operations is welcome. But this doesn’t mean we should automatically include ESG targets in pay. There are lots of practical difficulties—and scope for unintended consequences—in linking pay to ESG.
“And there’s a risk that more ESG targets simply results in more pay, due to the difficulty of knowing how stretching these targets are.”
As for US attitudes to ESG in pay, Pay Governance says it expects the gap with the UK and EU to close over the next two or three years. The focus on ESG, especially those linked to social and environmental issues, will only increase.
But it looks like the US is at a turning point. “Once adopted, it will be difficult to turn back,” says Pay Governance, “and many US companies are conducting their materiality assessments to select the metrics and goals that will have the greatest impact on the company’s long-term performance.”
Executives are about to see the criteria for pay go through a significant update.