Aligning Incentives to Drive ESG Strategies and Satisfy Investors
March 14, 2022
At a glance
- Make it personal to drive action: Boards are feeling the pressure to take a meaningful approach to environmental, social and governance (ESG) issues and have begun leaning into incentives to drive company-wide adoption.
- Sustainability matters: In the final part of our case for ESG investing series, we explore the shift towards corporate social responsibility.
- Partner with ESG specialists: Aprio’s ESG Team can provide support and resources to help you incorporate ESG into your compensation programs.
Are you ready to build your social balance sheet? Contact our team for a free consultation.
The full story:
Boards are aware and increasingly prioritizing the important role environmental, social and governance (ESG) issues play in their company because of their longer-term impact on the bottom line. It’s not another trendy fad that will eventually fade away. In fact, many boards are feeling the pressure to provide more transparency as investors pay closer attention to ESG metrics and how sustainability is embedded in company-wide strategies.
So how can companies adopt ESG strategies and satisfy the demand from investors?
Famed investor Charlie Munger once quipped “Show me the incentive and I will show you the outcome.” The approach we are seeing gain attraction is integrating ESG into compensation programs for top executives. Large, publicly-traded companies such as, Apple, Starbucks, Caterpillar and Royal Dutch Shell have already linked ESG initiatives to executive incentives and this phenomenon will begin to trickle down to medium and small-sized companies.
With the growing number of companies looking to incent ESG, there are two methods that can be used to capture quantifiable metrics as ESG is integrated into compensation packages.
- One of the most commonly used methods to compensate for ESG initiatives is applying it directly into the annual incentive programs (AIP). ESG makes up roughly 10% of AIP, however, since companies use a variety of metrics to measure ESG, that range can actually be measured between 5% to 40% of AIP, according to Willis Towers Watson’s Global Executive Compensation Analysis Team (GECAT). 1
- Many companies view long-term incentive (LTI) programs as opportunities to drive changes in behavior through performance reviews and stock-options. In fact, only 4% of boards use LTI programs for ESG incentives, according to Willis Towers Watson’s GECAT research. While that may be seen as a low percentage, applying ESG incentives into LTI programs is a viable method and may continue to grow as more companies are feeling the pressure from boards to implement an ESG strategy.
Incentivizing ESG makes it personal
Incentives drive actions and by offering compensation to align ESG initiatives, executives have an underlying purpose and accountability to make ESG a top priority and a embed clear strategy company-wide. In the corporate world there has always been the debate of purpose-over-profit, and while that is true for many, incenting ESG is giving executives a personal reason to implement ESG into the company. We believe that compensation tied to ESG success will continue to penetrate the executive ranks to deepen the focus on measuring and achieving company objectives.
The bottom line
Investors are looking for companies who are focused on ESG development and implementing strategies in a meaningful way rather than subjectively. While larger companies have taken the helm when it comes to ESG investing and incentivizing executives, there is still plenty of work to do. Aprio’s ESG Team can provide support and resources to help you incorporate ESG into your compensation programs.
To learn more about the case for ESG investing series, read The Evolution of ESG: From Niche to Mainstream and 5 ESG Investment Benefits for Management.
Are you ready to build your social balance sheet? Schedule a free consultation with us today.
- The Evolution of ESG: From Niche to Mainstream
- 5 ESG Investment Benefits for Management
- About Aprio’s ESG Practice
 Willis Towers Watson Global Executive Compensation Analysis Team (GECAT), “New research finds progress on the use of ESG incentive metrics,” March 2020, accessed March 2022.