Semler Brossy
Jones has 30 years of experience in executive compensation consulting, primarily advising public company boards but also private and pre-IPO companies. Ms. Jones has extensive experience across healthcare, retail, consumer products, automotive and aerospace industries. She has expertise in advising boards on company transitions, significant investor concerns and an expanding human capital management mandate.
Ms. Jones regularly speaks at leading boards of directors and executive forums and is a prominent author in the executive compensation space. Her articles have been featured in many publications including NACD Directorship, Directors & Boards, Harvard Business Review, Workspan, Corporate Board Member and Bloomberg. Ms. Jones was a many-year member of the Executive Rewards Advisory Council for WorldatWork and co-founded WorldatWork’s Women in Executive Compensation and Regional Executive Compensation Roundtables. Ms. Jones participates in broader governance dialogue at the steering committee of the U.S. 30% Club and Harvard Law School Corporate Governance Roundtables.
Ms. Jones began her career at Bain & Company. Prior to joining Semler Brossy, Ms. Jones was Practice Leader in Leadership Performance and Rewards at Sibson Consulting. Ms. Jones holds a B.A. from Williams College in chemistry, with highest honors.
Eager to give greater attention to stakeholders beyond investors, corporate boards have been adding environmental, social and governance (ESG) issues to their agenda. Prompted by institutional investors and proxy advisors—and from other stakeholder groups—they’ve begun considering translating those concerns into their executive pay packages. At Semler Brossy, we’ve seen a dramatic increase in client inquiries on this challenge.
Linking ESG metrics to executive pay is a powerful way to drive change, but compensation is a sensitive instrument, so we urge caution. Compensation real estate is limited. Each new metric may dampen the emphasis on existing metrics. It is important to balance all incentive metrics to gain the most powerful effect. Companies can be most effective with ESG metrics starting with just the most relevant issues for them and their industry or sector, rather than trying to address all ESG elements.
Companies can assess a number of worthy goals against the company’s specific strategy for customers, employees and other stakeholders. Where can you make the biggest impact or where do you have the biggest gaps? What metrics best drive competitive advantage? Are you looking to limit a major risk or capture a big opportunity?
As with any other new metric, ESG metrics should be crafted to reflect the company’s context and ESG priorities—and to complement the existing pay incentives. The company should also test a metric before including it in compensation, to reveal unintended consequences or the possibility of gaming. Rather than a single decision, new pay metrics involve a process that begins with elevating certain issues internally and externally. No need to know everything at once; boards can move from incorporating metrics in a general scorecard to more specific incentives as they better understand the dynamics of certain issues.
The board’s commitment is critical—this must not be a short-term publicity exercise. ESG goals almost always require multi-year efforts. There’s also a signaling component: While adding the metric to your incentives may send a positive message, taking it away or diluting it later will do the opposite.
Compensation isn’t the only tool for ESG. For at least some issues, organizations might do better with reinforcing the importance of the metrics through who gets promoted or cultural shifts, rather than new pay incentives. But the urgency of ESG makes it a natural addition to many company’s pay packages over time. If done well, it can help the company and society thrive in the long term.
Center On Executive Compensation
Ani Huang is President and CEO of the Center On Executive Compensation and Senior Vice President of the HR Policy Association. Ms. Huang joined the Association in January 2012 from Global Payments, Inc., where she was Vice President of Global Compensation and Benefits. She has almost two decades of experience in compensation and human resources.
In her current role, Ms. Huang is responsible for overseeing the Center’s practice on a wide variety of executive compensation and governance issues as well as subscriber engagement and Center research and writing. She is a frequent speaker and writer on the topics of executive compensation and governance.
Prior to serving as Vice President of Global Compensation and Benefits at Global Payments, Ms. Huang held various positions at Deutsche Bank A.G. in New York and Tokyo. She is a graduate of Stanford University.
The Center On Executive Compensation’s recent survey showed that almost half of our members either have an existing diversity and inclusion (D&I) metric in their incentive plan or will be adding one for 2021. However, there is clearly a lot to be learned about the best way to implement a metric like this; even for companies with a long-standing practice of setting diversity goals, tying those goals to executive compensation is a new proposition.
The most important consideration for any incentive plan metric has to be results. The company’s task is to determine which metric, or combination of metrics, will best correlate over time with the results desired by the company and its shareholders. In the case of diversity and inclusion, the result should be increased and sustained representation of women, people of color, and members of underrepresented communities in the workforce and at the management level. But the best way to achieve this result may differ substantially by company.
Increasing representation, especially at the management level, is a long-term goal. However, the vast majority of companies using D&I metrics in their incentive plans today do so in the annual plan. If the metrics are related to the ways in which the company has decided to achieve its representation goals, such as metrics around diverse hiring, promotion or managing attrition, this makes sense. But if a result-oriented goal is desired, such as “increase representation of people of color in management by 10%,” it may make more sense to place this goal in the long-term plan. For example, Prudential Financial applies a modifier of plus or minus 10% to its performance share awards based on increasing diverse representation at leadership levels throughout the company.
We are experiencing a radical period of experimentation as companies make bold decisions about what inclusion and diversity means to them and how best to achieve meaningful results. There is likely to be considerable evolution as best practices begin to coalesce. It will be critical to maintain a results-focused lens when it comes to determining what worked and what didn’t, just as we do with more familiar financial or operational metrics. Despite strong efforts by companies in the past, very little has changed when it comes to Black and Hispanic representation in management over the past 30 years. If our current efforts are to bear fruit, we must keep the end goal (increased diverse representation at all levels) constantly in mind.
Sustainable Governance Partners
Rob Main, CFA, is Managing Partner and COO at Sustainable Governance Partners (SGP), an ESG advisory firm that helps public company executives and directors navigate the ESG issues that matter to their institutional investors. Mr. Main specializes in strategy development, board related matters, investor engagement and executive compensation. Mr. Main was previously the Head of Investment Stewardship for the Americas and Asia at Vanguard. His responsibilities included company engagement, ESG research, proxy voting and policy development. He is a thought leader in the industry and a frequent participant on panels and roundtables.
Mr. Main earned a B.S. from the University of Richmond, and an MBA from Villanova University. He is a CFA charterholder and is a member of the CFA Society of Philadelphia. He currently serves as adjunct faculty in Villanova University’s MBA program and has guest lectured at Harvard University, Drexel University and at Villanova’s Charles Widger School of Law. Mr. Main previously served on the Corporate Governance Advisory Council of the Council of Institutional Investors (CII).
The Age of ESG represents a paradigm shift in the relationships between public companies and their investors. Today, most investors expect companies to have a clearly articulated ESG strategy that is integrated with the company’s plan for long-term value creation. As ESG strategy is becoming “table stakes” for public companies, attention is now turning to how companies can incorporate ESG into executive compensation in ways that will incent strong business results and address material ESG risks and opportunities.
From SGP’s recent dialogue with institutional investors and asset managers representing over $25 trillion in assets under management, several key considerations emerge:
Materiality. The ESG issues that are included in executive compensation should have both high impact to the business’s financial outcomes, and high importance to stakeholders who impact the success of the business.
Management influence or control. As with financial metrics, the ESG metrics on which an executive is assessed should track outcomes that the CEO and other named executives can impact through their decision-making, execution and management of the business.
Board oversight. For the board or compensation committee to evaluate a management team based on ESG objectives, it is essential that they have the requisite ESG acumen and information.
Time period. When thoughtfully employed, ESG objectives will line up with the appropriate time period, recognizing that some matters are best addressed over multiple years, while others are better suited to an annual cycle.
Engagement. Critically, a company must engage with its long-term shareholders to hear their perspectives on the relevance of specific ESG issue(s) to the company’s long-term value proposition, on best practices for ESG compensation integration, and on how they—the investor—measure success or failure when it comes to ESG risk management.
As the use of ESG metrics in compensation evolves, companies have some latitude to determine ESG topics, metrics, targets and weightings. However, as investors continue to prioritize ESG issues, they are likely to develop minimum expectations—many of which, we anticipate, will drive at the considerations listed above. Leading companies will focus on including ESG issues in compensation that are grounded in materiality, will actively incorporate investor feedback and will keep their boards educated on the ESG issues that matter to investors.
Korn Ferry
Irv Becker is Vice Chairman of Korn Ferry’s Executive Pay & Governance business, based in the firm’s New York office. Mr. Becker partners with boards and senior executives to create sustainable organizations, enhancing the effectiveness of the board/CEO relationship. He works with groups to design and develop reward programs, aligning executive efforts and results with the success of the company.
Mr. Becker’s financial background provides a grounded perspective on performance measurement and management. Since 2008, Mr. Becker has been included on the Directorship 100, a list published by Directorship magazine recognizing the most influential people who shape agendas and corporate governance issues in boardrooms across America.
Mr. Becker has worked with major public and private corporations across multiple industries. His clients range the spectrum from Fortune 50 companies to pre-IPO startups. He has worked with companies involved with initial public offerings, mergers, acquisitions and divestitures, as well as helped organizations develop new reward philosophies and approaches to support a major change in business direction.
The incorporation of ESG metrics in incentive programs happened with uncanny speed. These new metrics seem to be a major discussion topic for every compensation committee. As more and more incentive programs begin to roll out with these metrics, what lessons have we already learned, and what do these programs look like five years from now?
When incorporating ESG, one of the crucial, although typically overlooked, decisions is the incentive plan time horizon. Nearly all of the ESG metrics in use at companies right now are housed in the short-term incentive program. Yet, many of our clients realize that the measurement of ESG, and particularly diversity and inclusion, is better done over a long-term period. So why are we not seeing more ESG metrics in long-term programs? Primarily, these metrics are new, and committees are not yet comfortable with quantitative assessment of the nonfinancial goals.
Broad acceptance of ESG in long-term programs is going to take some time. There is a tension in the boardroom. Compensation committee members want to motivate executives in new directions, but they fear the unintended consequences. While long-term measurement may be best, there is little confidence in committing to quantitative goals without a proven record of effectiveness and information reliability.
These concerns have turned the short-term incentive program into a proving ground. Once compensation committees see that the STI programs are creating movement on these new initiatives and motivating the appropriate behaviors, more companies will naturally transition the ESG metrics into their long-term programs.
Transitions of this type typically last two to three years, during which time the incentive programs should focus on process training, implementation, and setting up monitoring systems. Building this framework lends to the credibility in reporting so desperately needed by committee members.
The speed with which ESG took root was astonishing. Directors should not make reactionary decisions, however. Compensation committees need to pause for a moment and consider their own long-term strategy in implementing these new incentive metrics. Plot a long-term course towards meaningful adoption of these ESG metrics into the company’s ethos.
J.P. Morgan Private Bank
Robert Barbetti, Managing Director, is the Global Head of Executive Compensation and Benefits at J.P. Morgan Private Bank. As a senior member of the Private Bank’s Advice Lab, Mr. Barbetti focuses on maximizing and optimizing executive compensation for insiders.
His expertise includes managing single stock concentrations, employment and severance packages, pre-IPO planning, M&A transactions and capital market solutions for executive compensation. In particular, Mr. Barbetti focuses on issues related to Sarbanes-Oxley and good corporate governance, especially those challenges faced by boards of directors.
ESG-related metrics have increasingly been incorporated as performance measures in companies’ incentive plans. To the extent that companies include sustainability metrics in their incentive plans, they should be material and aligned with a company’s long-term strategy. It is important that companies using sustainability performance metrics explain carefully the connection between what is being measured and rewarded alongside business goals and long-term performance. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts.
How do companies determine which sustainability objectives are most material for them, and how do they transform those goals into measures for purposes of incentive compensation? Initially, a “scorecard” approach can be used to combine the company’s ESG priorities. As the board gradually becomes more familiar with these incentives, the board can replace the scorecard with hard metrics measuring annual progress toward long-term goals. These goals will likely extend to the long-term incentive (LTI) plan as well since most require multi-year effort. It is important to use objective metrics since numbers will help communicate to the organization the progress.
Some companies may elect to create their ESG incentives with various degrees of importance within executive incentive plans. For example, there may be a weaker link between the ESG objectives and a defined business purpose. Another approach may include multiple ESG metrics without requiring quantitative goals. And, finally, quantitative targets with well-defined goals may be used. Linking ESG metrics to executive compensation is a powerful way to push for change. Companies in certain sectors may look to particular industry-related goals, such as carbon emissions in energy.
Even though ESG objectives are prevalent in a number of public companies, priorities among those objectives must be elevated. Once boards have clarified which ESG metrics are important for the company, they can incorporate them into incentive compensation plans. The board buy-in is critical as it must be a serious, multi-year effort.
Cooley LLP
Amy Wood is Chair of Cooley’s compensation & benefits practice group. Her practice focuses on executive and director compensation, corporate governance and shareholder engagement for public companies. Her experience includes designing, implementing and disclosing executive compensation arrangements, such as equity incentive plans, bonus plans, performance awards, change in control and severance plans and employment agreements. Ms. Wood advises clients on the impact of ISS, Glass Lewis and institutional investor policies and the shareholder relations issues that arise in connection with compensation and corporate governance matters.
Incorporating ESG (including DE&I) metrics into compensation programs is typically not a controversial concept, but selecting the right metrics and determining how to incorporate them can be surprisingly challenging. Before ESG metrics can be incorporated into a company’s compensation arrangements, ESG risks and opportunities should be identified and integrated into the long-term business strategy. From there, boards can select ESG metrics that are material to the business and aligned with the long-term business strategy. To the extent another committee is charged with oversight of ESG, the compensation committee will likely want to collaborate with such committee when selecting ESG metrics and incorporating them into compensation arrangements. When selecting metrics, it is also important to remember that investors expect to see rigorous goals and robust disclosure, including about payout decisions.
In addition to identifying ESG metrics, it is necessary to determine how and where they will be incorporated and how performance will be measured, considering that achieving certain types of ESG metrics could take many years, and meaningful progress may not be aligned with standard performance periods. Specifically, it is necessary to determine whether to incorporate ESG metrics into an annual or multi-year plan; whether to allocate specific weightings, use ESG metrics as a payout modifier or incorporate them into a broader strategic category or as part of individual performance assessments; whether to measure performance qualitatively or quantitatively; whether to measure performance on an absolute or relative basis and whether to reserve board discretion to measure achievements. What boards determine is appropriate and what investors are willing to support may differ from positions taken on other strategic metrics. For example, investors may be more receptive to the use of discretion in measuring achievement of ESG metrics than financial or operational metrics, as long as there is robust disclosure about the factors taken into consideration when applying discretion.
Companies in earlier stages of determining and disclosing ESG strategies, developing the internal reporting capabilities necessary to accurately monitor and assess performance against ESG metrics, or that are not yet measuring and reporting ESG performance should consider phasing ESG metrics into compensation arrangements over time. For example, it may be appropriate to start with lower weightings or more subjective goals and over time move toward more objective and impactful metrics.