Major U.S. companies are tying executive bonuses to progress on ESG targets, as the green agenda becomes increasingly important for investors and stakeholders.
Most recently, coffee chain Starbucks made reducing plastic and methane emissions a criterion for CEO Kevin Johnson receiving his full 2021 bonus package of $20 million, as reported by the Financial Times. Ten percent of Johnson’s bonus will be awarded for progress on environmental measures, including “methane reduction” and “eliminating plastic straws”, Starbucks said. The company added that it had introduced biodegradable straws in 2021 and is planning to launch a sustainable dairy initiative this year.
Another 10 percent of Johnson’s bonus will be tied to workplace goals including retaining workers from minority groups. This brings the total ESG-related payments to 20 percent of the CEO’s bonus.
Starbucks is not alone in linking bonuses with ESG targets – a record number of American companies are now doing this, according to research by law firm Shearman & Sterling. Other “blue chip” companies which have made bonuses contingent on ESG performance include Disney and Apple, metallurgical company Alcoa, and fast food chain McDonald’s.
Pay provisions related to workplace diversity, sustainability, and corporate responsibility have all increased since 2018. The latter has jumped by more than 13%, according to research by Institutional Shareholder Services ESG.
Of the top 100 Companies listed on NYSE or NASDAQ, 41 have included ESG metrics in 2021 compensation packages. This is more than the amount which included ESG in their annual plan.
Last year, Starbucks was among the record number of companies who failed to win support for bonuses from shareholders. It proposed offering its CEO a $50 million payment for staying in the role, prompting company shareholders to vote against the bonus, but the vote was symbolic, not binding.
The incorporation of ESG criteria is in large part designed to appeal to shareholders – a sign that the green agenda is now gaining weight in market dynamics.
Survey data supports the notion that investors rate ESG targets highly. According to RBC Global Asset Management’s 2021 Responsible Investing Survey, 72 percent of global investors integrate ESG principles into their investment approach. In addition, 83 percent of the respondents said they believe ESG-integrated portfolios are likely to perform best, which is a 40 percent increase from 2020.
In addition to pressure from investors, this change has partly been driven by regulatory activities. The US Securities and Exchange Commission is currently developing a mandatory climate risk disclosure rule for American companies. It is conceivable that American companies integrating ESG into executive pay is a case of jumping before you are pushed.
But this trend is still in its early stages and is far from uniform across companies. Just like sustainability reporting, which remains distinctly patchy, diverse approaches to ESG in executive compensation could hinder attempts to de-carbonise big companies.
Even among those companies which do incorporate ESG in executive compensation packages, only a meagre 10 percent of their bonus is usually linked to sustainability targets. And as global markets plunge into a volatile year, some critics say unambitious ESG goals are being used as a way to recoup the bonuses which executives are likely to lose as a result of poor share performance.
Others are sceptical that ESG bonuses are anything more than a token offering designed to appease shareholders, unlikely to make a big difference to emissions. As companies can effectively pick their criteria to fulfil these targets, they can set themselves easy goals by comparing emissions reductions to a year when emissions were particularly high, for example.
The burning question is how shareholders around the world will react now that the trend for ESG targets is gaining steam. It’s possible that stakeholders of other large companies will demand similar targets, and that this will be enough to satisfy their environmental instincts. Or perhaps the small victory of making CEOs more answerable for the company’s footprint will encourage shareholders to ask for still more accountability.
