ESG activists see executive pay as tool for raising standards

Activists pushing for big ­business to take climate change, diversity and human rights more seriously have found a new tool: boardroom bonuses.

As executive pay surges past its pre-pandemic levels, they are seeking to tie bonuses to environmental or social goals. Chief executive pay at the 500 largest US companies by revenue hit a median of $14.2mn last year, according to pay consultancy Equilar, sharply ahead of the $12.3mn in 2019. Spending on private jets for executives also hit a 10-year high in 2021.

Bonuses in these pay packages are typically linked to total shareholder return — meaning that, when the investing public benefits from a company’s rising share price, so do executives through higher payouts. But, as activists seek to push companies to cut emissions and improve diversity, they are zeroing in on executives’ wallets.

Before 2020, the year of Covid-19 and George Floyd’s murder, the use of ESG factors in determining executive pay was barely tracked and not well defined. This year, 70 per cent of S&P 500 companies incorporated some type of environmental, social and governance (ESG) factor into executive bonus plans, up from 57 per cent a year ago, according to a July report from consultancy SemlerBrossy. Tying pay to diversity-and-inclusion goals, or a carbon footprint, were the two factors that saw the largest year-on-year increases, the firm said.

At companies’ annual meetings in the first half of this year, investors again pushed companies hard to link pay to environmental and social goals — with varying outcomes.

In Japan, investors challenged two companies to link pay to carbon reduction.

At JFE Holdings, Japan’s second-largest steel producer, the management agreed to tie pay to climate progress before the issue went to a vote. “Remuneration-climate linkage is an increasingly important marker of credibility in company plans,” notes Jason Mitchell, head of responsible investment research at JFE investor Man Group, which engaged with the company on climate concerns.

A second tussle on pay and climate at J-Power — involving Man Group and two other shareholders in the electric utility — was less successful, though. In this case, the company was less co-operative with investors and the pay petition secured only 19 per cent support from shareholders at a vote in June.

Investors have launched similar campaigns in the US.

Remuneration-climate linkage is an increasingly important marker of credibility in company plans

A shareholder proposal at General Motors called on the company to link pay with climate targets, but the petition drew only 16 per cent support from shareholders in 2021. However, investors scored a win at Valero Energy, a fuel refining and retail company, which agreed to make pay changes based on climate without a shareholder vote.

Danielle Fugere, president of As You Sow, a non-profit that led the pay proposals at GM and Valero, wants ESG-linkage to involve long-term bonuses, rather than annual payouts. “The whole point is to incentivise outperformance and progress,” she argues.

Some companies are acting on their own. Morgan Stanley analysts highlight Devon Energy — an oil and gas group with a big carbon footprint — that has added ESG metrics to bonuses to drive changes. These metrics include cutting gas flaring emissions and oil spills, as well as reducing serious injury accidents, the company has said. At Valero, ESG metrics include diversity, equality and inclusion goals.

Measurement works. Kevin Johnson, Starbucks’s recently retired chief executive, earned a slice of his 2021 bonus by cutting the coffee chain’s methane emissions and the use of plastic straws.

Asset managers are now pushing companies to do more than simply include ESG metrics in pay. AllianceBernstein has started to push companies to explain how progress on ESG pay metrics is measured and to disclose performance against those goals. “Ultimately, we want [companies] to include material, measurable ESG metrics in their executive compensation plans,” the firm said earlier this year.

AllianceBernstein has been one of the most forceful asset managers in demanding rigorous ESG pay metrics, says Brian Bueno, ESG leader at Farient Advisers, a pay consultancy. “[They were] one of the ones that stood out as actually encouraging the use of ESG measures,” he says. Others “took a softer approach”.

While climate concerns tend to be the dominant ESG factor, investors also say they want companies to tie pay to workplace diversity.

SemlerBrossy noted that Xylem, a water conservation company, is a rare example of a company that has baked social goals into annual and long-term bonuses. In 2021, it offered special performance stock bonuses on ESG goals. These shares comprise up to 15 per cent of total pay for all executives at the company.

“The attention on internal pay equity through a DEI lens is one of the headlines from this most recently completed proxy season,” says Rich Fields, head of the board effectiveness practice at Russell Reynolds Associates, a leadership advice and recruiting consultancy. “Companies that have not yet been forced by shareholder proposals to grapple with it should be doing so voluntarily.”