Large public companies significantly ramped the integration of ESG metrics in executive incentive compensation plans over the past year, according to a new report released by global advisory, broking and solutions company WTW, with more than three quarters of companies utilizing at least one ESG metric in 2022, and use of environmental and DEI metrics roughly doubling over the prior year.

For the report, WTW examined the disclosures of 885 of the largest public companies in the US, Europe, UK and Canada, across multiple sectors, and with median annual revenue of $10 billion.

The study found that 77% of companies surveyed use at least one ESG metric in their incentive plans, up from 68% in 2021. ESG metrics are most commonly used in short-term incentive (STI) plans, with 75% of companies using at least one metric for these plans (vs 66% last year), while ESG integration into long-term incentive (LTI) plans is growing rapidly, reaching 21% in 2022, compared to only 13% the prior year.

By category, Environment and Diversity, Equity and Inclusion (DEI) saw the most significant increases over the past year, with 40% of companies now including at least one environmental metric in executive compensation plans in 2022, up from 22% in 2021, and 45% using a DEI metric, up from 22%.

Richard Belfield, Executive Compensation & Board Advisory Practice Leader, Europe at WTW, said:

“Pressure from institutional investors, proxy advisors, employees and other market stakeholders is reshaping the envelope. Companies are beginning to focus on a stronger link between their executive compensation plans and ESG priorities, particularly with respect to climate change and environmental measures, inclusion and diversity matters, and overall human capital governance.”

Overall, 72% of companies were found to be using at least one social metric such as DEI or employee health and safety, while 45% use at least one governance metric, and 40% use environmental metrics.

The most prevalent methods used in each category according to the report included carbon emissions reductions, energy transition and environmental planning for environmental, succession/talent management, employee engagement, management representation and workforce representation for social, and stakeholder relationship and compliance for governance.

Kenneth Kuk, senior director, Executive Compensation and Board Advisory, WTW, said:

“The link between executive compensation plans and ESG priorities is no doubt growing stronger particularly relating to climate, DEI [diversity, equity and inclusion] and other human capital matters. We expect further development in the measurement, reporting and governance of ESG metrics in the next few years.”

The report also highlighted differences by region and sector in the incorporation of ESG metrics into compensation. Europe had the highest proportion of companies utilizing ESG metrics for incentive plans at 91%, with the US at the lowest with 69%. The differences were particularly pronounced in long-term plans, with 46% of companies in Europe integrating metrics into LTI plans, compared to 37% in the UK, and only 8% in the US and 7% in Canada.

By sector, the prevalence of ESG in incentive plans was greatest in the Utilities and Energy sectors, at 93% and 92%, respectively, and least common in the IT sector, at only 59%. While Consumer Discretionary was the second least common, at 68%, the sector saw the most rapid increase in use of ESG metrics in incentive plans, growing 14 percentage points over the past year.

Shai Ganu, Global Practice Leader, Executive Compensation and Board Advisory, WTW, said:

“We believe that adopting ESG metrics for executive incentives is a best practice, and we continue to advocate the alignment between ESG priorities with business strategy.”

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