ESG Targets in Executive Compensation

A recent study from Harvard indicates that companies with strong environmental, social, and governance (ESG) performance tend to have better returns than those without. Does this mean you should be implementing ESG targets as part of your company’s executive compensation plan? 

Your company’s executive structure is a critical driver of its corporate governance and accountability, so including ESG components in your overall strategy can be helpful.

By offering incentives that reward good behavior and help maintain a culture of responsibility, you can create a more substantial investment case for investors looking to invest in companies that share their values.

Attracting Investors With ESG Targets

In a world of increasingly conscious and activist investors, implementing ESG targets into your executive compensation plan can help attract potential investors who want to align their investments with their social values. These investors want to know that their money is being put toward something sustainable and responsible — that’s where ESG comes in.

By incorporating ESG criteria into your executive compensation plan, you can show potential investors that you’re taking their values seriously and working toward making a positive impact in the world. This can go a long way in convincing these investors to invest in your company.

ESG criteria are also appealing to and beneficial for your company’s current stakeholders. To maintain their loyalty to your company, you must ensure that your executive compensation plan reflects a commitment to ESG goals and progress. Investors want to see a company moving in a positive direction and reward stakeholders who improve the company. 

Creating ESG Targets That Matter

The creation of meaningful ESG targets starts with understanding what is valued by your stakeholders — is it reducing carbon emissions, improving diversity and inclusion measures, or investing in renewable energy sources?

Once you know the goals you should be focusing on, you can create measurable objectives and assign them to the appropriate executive team members.

KPIs for your ESG targets should be metrics that are easy to measure and monitor. Such KPIs may include emission reduction, energy usage improvement, employee engagement score, and diversity and inclusion metrics.

Here, the aim should be to create specific, measurable, and time-bound objectives — which your executive team can use for tracking whether and how the ESG targets are being achieved over time.

Implementing ESG Targets in Your Executive Compensation Plan

After identifying the ESG targets your stakeholders value, along with the metrics for measuring them, you can implement those targets into your executive compensation plan as follows:

• Link bonuses and long-term incentive plans. Ensure that your executive team’s bonuses and stock options are tied to its progress on ESG goals. This will create a strong incentive for them to meet those objectives and help ensure they’re always working towards improving the company.

• Create achievable targets. Setting realistic goals that your executive team can reach is essential — unattainable targets won’t do anyone any good.

• Assign accountability. Make sure you assign ownership of each target to a specific executive and hold them accountable for its progress.

• Consider non-financial rewards. Not all rewards need to be financial. Public recognition, additional vacation days, and company outings can all be powerful motivators for your executive team.

• Provide regular progress updates. Keep your executive team members regularly updated on their progress and on any changes to their goals and objectives. This will help keep them accountable and on track with their targets.

• Align goals with investor expectations. Keep up to date with investor expectations and ensure your ESG targets align with their values. This will help you attract potential investors who believe in sustainability while keeping your stakeholders satisfied.

Who’s Winning the ESG Performance Race?

A Harvard Law School study indicated that ESG-focused companies outperform the competition. Specifically, 73% of S&P 500 companies now include ESG targets in their executive compensation plans. These companies include Apple, Microsoft, and Amazon. All of them have been praised for their commitment to sustainably-focused goals — and the numbers show that it’s paying off.

Adopting ESG targets provides numerous benefits — from improved employee engagement to increased investor loyalty. The trend of companies including these objectives in their executive compensation plans is only getting stronger. Havard’s study indicates an increase in the number of companies implementing ESG goals will continue in the years to come.

This study also shows that while European companies are incorporating more ESG measures into executive compensation, their pace is not significantly higher than in the U.S. In fact, while 42% of top European companies tie executive pay to ESG performance, all European countries don’t integrate ESG goals consistently.

As for the U.S., the trend is heavily influenced by the market and profitability. This lays a solid foundation for more companies to begin including ESG targets in their executive compensation plans.

Making ESG Targets Work for You

Creating and implementing meaningful ESG targets doesn’t have to be an overwhelming task. With proper planning and execution, you can ensure that your executive team is making measurable progress toward sustainability-focused objectives and that your investors remain happy.

From improving diversity and inclusion measures to investing in renewable energy sources, there are plenty of ways for companies to positively impact their stakeholders and the environment.

You can start by determining the ESG targets that impact your business most and then build measurable KPIs to track progress. By taking the time to research and map out achievable objectives, you can ensure that your executive team is always working toward making your company better.

How To Get Help With ESG Goals

The federal government as well as many state and local governments offer resources to help companies incorporate ESG objectives into their executive compensation plans. Also, many organizations are dedicated to helping companies navigate the complexities associated with corporate sustainability initiatives.

The SEC has created a task force focused on ESG-related topics, and the Sustainability Accounting Standards Board (SASB) provides guidance on how to best report performance. Many universities and non-profit organizations also have dedicated research centers focused on ESG topics, where they provide helpful resources for businesses looking to make a difference.

Adopting meaningful ESG targets in executive compensation plans is essential for creating a more sustainable future. With the right resources and guidance, any business can make significant progress toward its sustainability objectives while keeping investors engaged and happy.

As executive recruiters, Ghost Mountain has extensive experience helping businesses get the most out of their ESG targets. By identifying objectives, creating KPIs, and monitoring progress, they can provide you with tailored advice and guidance to ensure success.