U.S. companies increasingly link executive pay to ESG metrics, with diverse strategies amidst mixed reactions to DEI initiatives.
Quiver AI Summary
A recent global study by WTW reveals that U.S. companies are increasingly incorporating environmental, social, and governance (ESG) metrics into executive incentive plans, with 77% of S&P 500 companies reporting they use at least one ESG metric, a significant rise from 52% four years ago. Despite some backlash against diversity, equity, and inclusion (DEI) initiatives, the use of DEI metrics in executive pay plans has remained stable, with 57% of U.S. companies reporting their inclusion. The study also found that ESG and non-financial metrics tend to yield about 10% higher payouts than financial metrics, raising concerns about the rigor of goal-setting in ESG metrics. Globally, 81% of companies have incorporated ESG metrics, with varying prevalence across regions, and the report suggests a future focus on the quality and relevance of these metrics.
Potential Positives
- Over three-quarters of S&P 500 companies (77%) have incorporated at least one ESG metric in their executive incentive plans, indicating a strong alignment with current corporate governance trends.
- The study reveals that U.S. companies are increasingly focused on human capital metrics, which are used by 72% of S&P 500 companies, highlighting a commitment to workforce development and sustainability.
- WTW's finding that ESG metrics yield about 10% higher payouts than financial metrics may enhance the perceived value of linking executive compensation to non-financial performance, potentially attracting positive investor sentiment.
Potential Negatives
- 29 companies eliminated ESG metrics from their executive incentive plans, indicating potential dissatisfaction or pushback against ESG initiatives.
- There is an observed plateauing in the use of ESG metrics in executive compensation, suggesting a lack of growth or momentum in integrating these important measures into corporate governance.
- Concerns from investors regarding the rigor and objectivity of ESG metrics, which may undermine confidence in how these metrics are evaluated and utilized in executive compensation.
FAQ
What does the WTW study reveal about ESG metrics in executive compensation?
The study shows that 77% of S&P 500 companies include ESG metrics in executive pay, stable from last year.
How have diversity, equity, and inclusion metrics changed recently?
Despite opposition, 57% of U.S. companies use DEI metrics, with 26 introducing them this year.
What is the impact of ESG metrics on executive payout?
ESG and non-financial metrics yield about 10% higher payouts than financial metrics among S&P 500 companies.
How common are ESG metrics in global executive incentive plans?
Globally, 81% of companies report using at least one ESG metric in their executive incentive plans.
What trends are seen in Asia Pacific and Europe regarding ESG metrics?
The prevalence of ESG metrics is stable in Europe (94%) and has slightly increased in Asia Pacific (74%).
Disclaimer: This is an AI-generated summary of a press release distributed by GlobeNewswire. The model used to summarize this release may make mistakes. See the full release here.
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Full Release
NEW YORK, Dec. 16, 2024 (GLOBE NEWSWIRE) -- As environmental, social and governance (ESG) metrics become a common feature in executive incentive plans, U.S. companies are focusing more on setting metrics that are better aligned to their business priorities, according to a new global study by WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company. The annual study also revealed the prevalence of diversity, equity and inclusion (DEI) metrics remained relatively stable despite recent backlash against corporate DEI initiatives.
In the U.S., more than three in four S&P 500 companies (77%) reported in this year’s proxies they incorporated at least one ESG metric in their executive incentive plans. That’s unchanged from the previous year but up sharply from 52% four years ago. Similarly, the number of companies using ESG measures in both short-term incentive (STI) and long-term incentive (LTI) plans remained unchanged at 75% and 9%, respectively.
Globally, 81% of companies incorporated at least one ESG metric in their executive incentive plan, a moderate increase from the previous year. Over three-quarters of global companies (77%) reported using ESG measures in their STI plans while 29% reported using ESG measures in their LTI plans.
Human capital metrics remain the most popular ESG metric category, used by 72% of S&P 500 companies and 73% of companies globally. Among U.S. companies, 57% use DEI metrics in their executive pay plans, including 26 companies that introduced the metrics this year. However, there were 29 companies that eliminated ESG metrics, and an additional six companies disclosed plans to remove DEI metrics in the current year.
“Despite some opposition on DEI goals and initiatives that some companies are experiencing, we see companies taking different approaches to DEI metrics,” said Kenneth Kuk, senior director, Work and Rewards, WTW. “While prevalence of DEI measures may continue to decrease amid pushback on corporate DEI initiatives, the remaining ones will better withstand scrutiny because these companies made a compelling case for why DEI helps drive business results and preserve long-term sustainable value for stakeholders. We would caution against only discussing human capital and DEI within the narrow context of ESG metrics in executive incentive plans given their broader business impact.”
WTW’s study also found that among S&P 500 companies, ESG and non-financial metrics tend to yield about 10% higher payout than financial metrics. This may validate investors’ concern that the level of rigor in goalsetting is not as robust with ESG metrics, especially when measurement is qualitative and discretionary.
WTW’s study also included 311 companies across eight major indices in Europe and 193 companies across seven major markets in the Asia Pacific region.
The key findings from those companies include the following:
Compared with the previous year, the prevalence of ESG metrics within executive incentive plans changed very little in Europe (94%) and Asia Pacific (74%).
In Europe, nearly two-thirds (64%) use ESG metrics in LTI plans, an increase of several percentage points from the previous year. In Asia Pacific, just 30% use ESG metrics in LTI plans.
“With the use of ESG measures in executive pay plans plateauing, we expect investors and boards to focus on the quality of ESG metrics and those that are most material and relevant to the business, ensuring that they are objective, measurable, and underpinned by a robust goalsetting approach,” said Kuk.
About the study
This research study reviews public disclosures from 500 companies listed in the S&P 500; the TSX 60 in Canada; eight major European indices, including the FTSE 100; and the largest companies across seven markets in the Asia Pacific region.
About WTW
At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.
Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you. Learn more at wtwco.com.
Media contacts
Ed Emerman: +1 609 240 2766
eemerman@eaglepr.com
Ileana Feoli: +1 212 309 5504
ileana.feoli@wtwco.com
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