NEW YORK--(BUSINESS WIRE)--Contrary to a belief of some corporate governance experts, the impact of ESG metrics reduced annual incentive payouts for 2021, according to a just-released study by Pay Governance, a premiere board-level executive compensation firm that advises the boards of many prominent publicly traded companies.
“Critics of including ESG in incentive plans have suggested executives were embracing this trend to increase incentive payouts, but those predictions do not hold true when you look at the details,” said Pay Governance Managing Partner Ira Kay.
The study is based on a subset of S&P 500 companies that filed their 2022 proxies as of April 7.
“There has been a sharp increase in the inclusion of ESG metrics among large companies the last two years,” said Partner Mike Kesner. “Based on our experience, Compensation Committees and executives have undertaken a good faith effort in using incentives to address ESG issues at the company level, with possible beneficial societal implications.”
Nearly 75 percent of the companies in the Pay Governance study had a lower ESG metric payout than their financial metric payout, resulting in a median reduction in annual bonuses of 9 percent.
“The reduction in incentive payouts indicates that if these companies had not included ESG metrics, the incentive payout would have been higher since it would have been based solely on financial metrics,” said Joadi Oglesby, a Consultant at Pay Governance.
“It is early in this process, and we need to wait for information about the impact of these corporate programs on companies’ long-term performance and sustainability, as well as the effect on societal problems,” said Kay. “But it does appear that the ESG incentive criticism, that executives are using these metrics inappropriately to increase their compensation, is not empirically supported.”
Pay Governance LLC is an independent consulting firm focused on delivering advisory services to compensation committees. The consultancy also advises the management of companies in situations in which the firm does not serve as the independent committee advisor. Pay Governance has locations throughout the United States in New York, Boston, Detroit, Philadelphia, Pittsburgh, Atlanta, Chicago, Dallas, Cleveland, St. Petersburg, San Francisco and Los Angeles. The firm also has strategic affiliate relationships with Pay Governance Japan and Pay Governance Korea. For more information, visit www.paygovernance.com.
