World Economic Forum Sustainability Metrics Compensation Trends
In a Harvard Study, it was found that 62% of companies in the Fortune 200 incorporate stakeholder metrics - ESG measures - in their executive compensation programs. However, the influence these metrics have on pay outcomes can differ drastically, with many companies using a largely discretionary assessment to determine payouts.
A growing coalition of 61 top business leaders across industries announced on January 26, 2021, their commitment to the Stakeholder Capitalism Metrics, a set of environmental, social and governance (ESG) metrics and disclosures released by the World Economic Forum and it's International Business Council (IBC) in September 2020, that measure the long-term enterprise value creation for all stakeholders.
This report highlights some of the companies that have taken the first few steps in linking Board of Directors Compensation to the Stakeholder Capitalism Metrics.
The Metrics (Core and Expanded)
Board Compensation Implications
Lets have a look at some of the Companies that have taken a lead in tying Board Compensation with attaining progress on WEF Metrics
1. Accenture
In determining the Annual Incentive Payouts, the named executive officers’ individual performance is evaluated against numerous measures, including the following: Unwavering commitment to inclusion and diversity: Achieving desired diversity outcomes, including diversity metrics related to recruitment, advancement and retention.
2. Alcoa
Alcoa puts a 30% weightage on Non-Financial Targets as a part of its Annual Incentive Payouts for Officers, which includes metrics around Safety of Employees, Diversity Metrics — Global Women, Female Hires and Women in Job Band 30+ in their hierarchy.
In addition, as a metric pertaining to their Long Term Incentive Plan — Carbon Intensity carries a 25% weightage. This metric aligns with Alcoa’s announced Strategic Sustainability Initiative and consists of two goals:
reducing carbon emissions in the refining operations (12.5% weighting), such that the Company is the lowest carbon dioxide emitter in the industry, and
increasing production from direct and purchased renewable energy in the smelting operations (12.5% weighting).
3. Apple
In 2021, Apple added an ESG “bonus modifier” to its cash incentive program which can swing the total bonus payout by 10% — executing on ESG goals can increase the bonus by 10%, while failing to hit ESG targets could cost Apple’s top brass a bonus reduction of the same amount.
Bank of America has introduced metrics in both the Company and Individual Parameters of its Annual Incentive Plan. It incorporates ESG and Human Capital Metrics (including Diversity and Inclusion) in the Company Parameters and “Grow in a Sustainable Manner” as one of the metrics to measure Individual Performance.
British Petroleum has traditionally had it’s annual incentive plan tied to ESG Goals. In 2021, BP’s weightage for Sustainability (Environment) has gone down from 20% to 15%
6. Mastercard
In 2021, Executive Vice-Presidents and Management Committee, which includes NEOs, performance against ESG metrics were assessed across the following areas:
Carbon neutrality (100% offset of operational CO2 emissions)
Financial inclusion (target based on additional participants in the digital economy)
Gender median pay gap (target based on improvement as a percentage)
Each of these metrics have been assigned a weight and specific quantitative targets. Performance against these goals will determine an ESG modifier to be applied to the financial performance score. The modifier can increase or decrease +/- 10 percentage points based on performance against the targets. These ESG metrics were selected based on their measurability, alignment with Mastercard’s business strategy and culture, and ability to impact them.
7. Shell
In 2021, Shell has revamped its Annual Incentive as well as Long Term Equity Programs to include Sustainability Goals.
The short term incentive plan incorporates a 20% weighting on Sustainable Development (safety and environment each weighted at 10%) based on Shell’s operating plan. This was based on recommendations from the Board’s Safety, Environment and Sustainability Committee.
For 2021 share awards, the weighting of the energy transition condition has doubled, and for the long-term incentive plan it has been increased from 10% to 20%. The target range for the 2021–2023 long-term incentive plan grant is a 6–8% reduction in net carbon intensity against the 2016 baseline of 79 grams of CO2 equivalent per megajoule.
8. Pepsico
In determining Incentive Payouts for Executives at Pepsico, Individual performance is assessed by progress relative to PepsiCo’s short-term and long-term business strategy with an emphasis on the delivery of aspirations to be Faster, Stronger and Better for associates, communities, consumers, customers, planet and shareholders.
9. IBM
Throughout IBM’s 110-year history, diversity and inclusion has been intrinsic to their corporate culture. The company believes growth and success can only be achieved by fostering a climate that values and seeks out diversity. In order to affirm management’s commitment to improving a diverse representation of our workforce, a modifier will be introduced to the Annual Incentive Program, providing a potential positive or negative adjustment to the AIP score depending on progress in diversity representation.
There is still a long way to go for Public and Private Boards to adopt the suggested common metrics framework to enable value creation for all stakeholders.This includes moving from reporting progress on “Core Metrics” to “Expanded Metrics” and disclosures. These metrics encourage companies to move from reporting outputs alone to capturing the impacts of their operations on nature and society across the full value chain, in more tangible, sophisticated ways, including the monetary value of impacts.
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