A goal's importance can often be traced to how it's measured. And as ESG continues to be an important company strategic goal, it's being tied to executive pay.
A recent survye from WTW, an advisory company, found that more than three in four S&P 500 companies (77%) reported in the 2024 proxies they incorporated at least one ESG metric in their executive incentive plans.
That number is 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, in a statement.
“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, Kuk, added. "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.