Blogs

"Purpose driven leadership: the evolving role of ESG metrics in executive compensation plans" from PwC suggests several factors for boards to consider in connection with their decision-making about whether to incorporate ESG metrics into executive compensation plans. Assuming the board decides to proceed, the publication provides guidance on how to approach selecting metrics and weighting, scope of applicability (e.g., CEO only, management team, all employees), metric structure/design, and the time frame (annual plan and/or LTIP). Numerous enumerated risks associated with adding new metrics makes clear that simply adding ESG metrics for the sake of appearances or as a result of peer pressure is not advisable, as unintended consequences may far outweigh the perceived upsides of doing so. 

In its latest compensation commentary (reported here), BlackRock emphasized that whether companies choose to use sustainability metrics is a board decision; however, when companies use them, it expects them to address issues material to the company’s business model, align with long-term strategic priorities, and incorporate the same rigor as other financial and operational targets. As previously reported (see “Sustainability-Linked Pay”), Glass Lewis has expressed reservations about the use of ESG pay metrics based on the potential risks and unintended consequences.