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In January, Apple disclosed in its proxy that it would begin tying bonus pay to environmental, social, and governance (ESG) targets starting in 2021. The compensation committee will apply a modifier related to the company’s performance on ESG goals to adjust annual incentive pay, up or down, by up to 10%, the proxy states.
According to sources, this new plan may be just the tip of the iceberg. However, the use of sustainability-related incentive metrics is still relatively rare and is most prevalent among utilities and energy companies.
For companies wishing to tie executive compensation to sustainability, simply including a metric in a pay plan is a start, says Aalap Shah, managing director at Pearl Meyer. However, according to Shah, one area where companies could improve would be to put more thought into where they put the metrics. By far, most companies include sustainability metrics in the annual incentive plan, but Shah advocates for their inclusion in long-term incentives.
“The fact that there are very few companies that have [sustainability measures] in their long-term incentives is illogical,” Shah says, suggesting that comp committees may have concerns about tying sustainability goals to the much larger long-term incentives. “The fear there is subjective and is not in the spirit of shareholder interests,” he adds.
“Even if it’s not in your incentive program, I think boards should set aside time on a semi-annual basis to review how the company is addressing sustainability,” says Shah. “Investors will be knocking on the door wanting to know.”