ESG Metrics in Compensation Plans and Executive Employment Agreements: See how some of America's largest companies are implementing sustainability metrics into their comp strategies.

• Author: Klein, Justin P.

For more than a decade, boards, investors, proxy advisors, public companies, trade associations, thought leaders and regulators have focused on the importance ofESG factors on the strategies, operations and responsibilities of public companies. The impetus for this focus comes from a concern on the part of companies and their boards that shareholder financial returns are not the only goal of a corporate strategy. In fact, there is evidence that companies with positive ESG records also demonstrate solid financial performance.

In reviewing and revising corporate strategies, boards are considering and integrating ESG matters, particularly the E and the S. Along these lines, boards and compensation committees have begun to include ESG metrics in compensation decisions, compensation plans and some executive employment agreements (collectively, compensation plan or plans). As a result, some portion of executive compensation at many companies is beginning to be measured by the individual or corporate achievement of ESG metrics.

These trends and demands raise a question about the information a board or compensation committee should have at its disposal as it considers whether to add ESG metrics to its compensation plans. In addition, boards and compensation committees will have to determine how to use such metrics and how to weigh and measure them.

BACKGROUND AND HISTORY

Investors have expressed their views through shareholder proposals, both in favor of and recently against ESG factors. With the focus on ESG by investors and proxy advisors, ESG has found its way into boardrooms and discussions on strategy and operations around climate, diversity and disclosure of the company's efforts in these areas. Boards have also looked at ways to incentivize employees to reach the ESG goals outlined in the company's strategy and to design compensation plans that reflect the company's priorities. Although there have been companies over the years that, because of the nature of their business, have included health, environmental and safety metrics in their executive compensation (e.g., energy/refining companies), the attention to ESG has led to the more recent focus on these metrics in executive compensation programs more generally.

A quarter of U.S. public companies included some form of ESG metric as part of their executive incentives in 2021, notes Glass Lewis, a proxy advisory firm. According to a March 2022 report published by PwC, 57% of S&P 500 companies...