North American boards lag on executive pay ESG links, survey finds

Aug 03, 2022
Concept of using ESG metrics gaining ground globally

Far fewer boards at companies in North America are linking their executives’ compensation to ESG than are their peers in Europe, according to new research.

A study conducted by Corporate Secretary finds that 60 percent of governance professional respondents in Europe say their board ties executive compensation to ESG, compared with just 37 percent of those in North America.

A growing number of investors are keen to see ESG being brought into the executive compensation fold as a means to incentivize management to reach goals such as enhancing diversity or reducing greenhouse gas emissions, which in turn they expect will help improve financial performance or avoid an array of risks.

A few years ago, only a handful of boards would have used ESG metrics in setting executive compensation packages. Companies and compensation advisers are still developing the methods for implementing this approach but, despite regional differences, the research indicates that the concept has rapidly gained ground.

Globally, 44 percent of respondents say their board links executive compensation to ESG metrics, while 45 percent say their board does not. Although just a third (33 percent) of respondents at small caps and 42 percent of those at large caps say their board links compensation to ESG, more than half of those at mid-caps (55 percent) and mega-caps (58 percent) report such links being used.

Among respondents globally who say executive pay is tied to ESG, the most frequently cited metric (72 percent) is environmental issues such as climate change, water, biodiversity and pollution.

The next-most frequently cited issues are health and safety (48 percent of respondents), diversity, equity and inclusion (DE&I) (44 percent), corporate culture (39 percent), supply-chain management (19 percent) and community relations (17 percent).

Less than half (47 percent) of those in North America whose board links executive compensation to ESG metrics say they use environmental issues, compared with an overwhelming 96 percent of those in Europe.

Globally, respondents at small-cap companies more frequently cite health and safety (73 percent) than do their peers at larger companies. Those at mega-caps more frequently cite DE&I (64 percent) than do their counterparts at smaller issuers.

The findings come from research conducted by Corporate Secretary into issues such as which board members are involved in compensation oversight, the extent to which outside advisers are used, the impact of Covid-19, investors’ questions about executive compensation and director engagement.

The report is based on the findings from an online survey conducted between December 2021 and February 2022. A total of 153 respondents took part, a majority of whom work in corporate secretary or general counsel offices. You can access the full report by clicking here.

Other findings include:

  • Sixty percent of respondents at small-cap companies say the compensation committee has primary oversight of executive compensation. By comparison, 90 percent of those at mid-cap companies say their compensation committee is in charge
  • Globally, 75 percent of respondents say their board uses an outside adviser(s) on executive compensation matters
  • Only around a quarter (27 percent) of respondents at mega-caps say their board’s main discussions on compensation take place in the first three months of the calendar year.
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