According to a recent comprehensive survey by Pay Governance, a major board-level executive compensation advisory firm, nearly all United Kingdom and European Union companies surveyed included ESG metrics in their incentive compensation plans, compared to less than one-fourth of United States companies surveyed. In addition, UK and EU companies had a much higher rate of ESG inclusion in long-term incentive plans. Pay Governance’s study was developed to determine if companies are responding to the recent attention to ESG and, if so, whether it is resulting in a change in the design of incentive compensation plans.
Some 90% of the 30 UK and EU companies said they included ESG metrics in their incentive compensation plans. One UK/EU company that did not include ESG metrics in their 2020 incentives disclosed to its shareholders that ESG metrics would be included in 2021 annual and long-term incentives. The research revealed that 89% of the UK/EU companies included ESG metrics in the annual incentive and 41% in the long-term incentive.
By contrast, US companies surveyed indicate that 21 of the 95 participating companies (22%) included ESG metrics in their 2020 incentive compensation plans. Of the companies including ESG metrics in incentive plans, 95% included them in the annual incentive and 5% included them in the long-term incentive. “Our research confirmed that UK and EU companies are well ahead of the United States in the inclusion of ESG metrics in incentive plans, and their approach to measuring and rewarding ESG achievements could be a harbinger of strategies used by US companies over the next several years,” said Pay Governance Managing Partner, Lane Ringlee.
Pay Governance Partner, John Ellerman, suggests that once ESG compensation plans are adopted by US companies, it will be difficult to turn back. “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,” said Ellerman. “Thus, as noted in our March Viewpoint newsletter, we continue to believe many US companies will use 2021 as a ‘launching pad’ for finalizing and rolling out ESG metrics in 2022 incentive plans.”