Executive Pay Metrics Moving Beyond Just the Numbers: Non-financial metrics may become a bigger part of the incentive calculation.

• Author: Barrall, Katherine
• Position: COMPENSATION MATTERS

Retailers like Target are using compensation metrics for senior executives related to redesigned store experiences and channel optimization in response to the evolving retail landscape. Meanwhile, oil and gas companies like Chevron are using metrics related to employee safety and environmental consciousness to promote business stewardship.

These types of strategic metrics vary across industries and companies, but their overall purpose is the same: to incentivize investments in the business that may not lead to short-term gains (and, in fact, may lead to short-term losses) but will affect the company's ability to operate, innovate and grow over the long term.

Such approaches are gaining traction as stakeholders across the spectrum accept the importance of a broad range of strategic priorities.

Investors and proxy advisory firms have long favored the use of quantitative objectives in incentive plans, and consequently, financial measures have taken the lion's share of incentive metric weightings. But investors may be open to embracing non-financial strategic metrics.

In his 2018 letter to CEOs, BlackRock chairman and CEO Larry Fink wrote "no company ... can achieve its full potential" without a clear long-term strategy and understanding of its environmental and social impact. Such understanding, he argued, is essential to prepare for potential challenges and sustain performance in an ever-changing world.

Other investors seem to agree. In Ernst & Young's 2017 survey of decision-makers at buy-side institutions globally, 92% of respondents agreed that "over the long term, environmental, social and governance (ESG) issues--ranging from climate change to diversity to board effectiveness --have real and quantifiable impacts" on businesses and their financial performance. Evidently, there is shareholder demand for focus on such strategic priorities, and companies can use them to give their short-term incentives an element of long-term orientation.

Nevertheless, companies must demonstrate the importance of their chosen strategic metrics as well as the rigor of their goals and goal-setting processes. With strategic metrics, the link to shareholder value creation is not as self-explanatory as with earnings or total shareholder return, for example, and such goals risk being dismissed as "soft goals" if companies do not treat them with the same transparency and processes that they do financial goals.

The following are ways that companies can successfully...