Irv Becker is a Vice Chairman of Korn Ferry’s Executive
Pay & Governance business. Mr. Becker has worked with major public and
private corporations across multiple industries. His clients range the spectrum
from Fortune 100 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.
ESG metrics are certainly the new kid on
the block, but we have to stop treating their use as special or different.
Rather, compensation committees need to bring the same rigor, analysis and
transparency to ESG as they do any financial metric. The case has already been
made as to why corporations should include ESG metrics: They support the bottom
line and have social or environmental benefits. But choosing the right metric
has proven to be a bit tricky for some committees. When selecting an ESG metric
to include in an executive compensation program, it is best to shake off any
notion that these metrics are “soft” and only an add-on to the incentive
An ESG metric’s role in executive pay should not be unlike
that of any other financial metric. It should support the strategy, be
meaningful and be transparent to both insiders and shareholders. So the
question is: What do these three elements look like?
Let’s start with strategy. Ensuring the ESG metric aligns
with business strategy is critical. Just like other financial metrics, ESG
should propel and compliment the larger corporate strategy. Understanding which
ESG metric fits into the business strategy begins with an examination of two
questions. First, a committee should ask what corporate actions would benefit
internal and/or external stakeholders. Second, does the corporation expect to
receive any long-term benefit in return? There may be multiple answers to these
questions, but it is important that the committee be able to eventually
articulate a clear benefit to a set of stakeholders and the corporation. If you
are unable to convey how ESG fits within a broader corporate strategy, you’re
probably using the wrong metric.
Our second point is that it needs to be meaningful. Korn
Ferry believes that any metric should make up no less than 10% of a short- or
long-term incentive program. This has important signaling effects both
internally and externally and helps ensure the work gets done. Anything less
suggests the metric is insignificant to the overall incentive program and the
company at large. Companies should also consider including ESG metrics in the
long-term program. Not only is the heft of executive pay located in long-term
programs, but many ESG metrics, such as diversity, inclusion and other
environmental objectives, naturally lend themselves to long-term measurement.
Finally, transparency is of utmost importance, both in terms
of disclosure and setting clear performance expectations. Housing a metric in
an individual performance assessment or a basket of qualitative factors
suggests the metric is not particularly meaningful to the company. If the
company has decided that ESG is an important strategic component, then its
metric and target disclosures should happen alongside those of any other
financial or nonfinancial metric.
These three elements should underpin any ESG metric
selection process. However, this process is not unique—it should be the basis
for any discussion of metrics. And while ESG may be new, it isn’t special, and
we need to treat it that way.
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 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 public policy, research and writing. She is a
frequent speaker and writer on the topics of executive compensation and
Prior to serving as Vice President of Global Compensation
and Benefits at Global Payments, Ms. Huang held various HR positions at
Deutsche Bank A.G. in New York and Tokyo. She is a graduate of Stanford
As calls for a more just society highlight
longstanding gender, racial and ethnic disparities, companies are responding by
setting goals for improvement. How should companies determine whether DEI goals
should be included in executive pay plans? What are the design challenges, and
how can they be addressed?
Should DEI Goals Be Included in Executive Incentives?
In deciding whether to include DEI goals in incentive plans,
companies should consider the following:
If achieving clear, measurable goals will help drive the
business and talent agenda of the company, then including them in executive
incentives may be appropriate.
What Are the Design Challenges, and How Can Companies
Incorporating DEI goals into incentives requires companies
to determine the desired weighting of the metrics, set realistic targets over
an appropriate timeframe and decide whether to include them in short-term or
Weighting of DEI metrics: Because DEI efforts are in
the early stages, most companies link a relatively small portion of pay to the
achievement of DEI goals. Some may also be concerned about the optics of
weakening their pay program’s link to financial performance. One potential
approach is to fund incentive pools based on financial performance while
differentiating individual awards based on diversity goals.
Setting targets and performance periods: Improving
workforce representation will depend on the growth prospects for the company’s
business as well as the demographics of its current workforce. Companies need
to do the math to analyze how much progress is realistic in the near term.
Setting goals that measure the retention of current diverse talent separately
from increased diversity hiring can create incentives to both foster an
inclusive culture and improve hiring performance.
Annual or long-term plan: Because progress can take
years, it may be appropriate to include a DEI goal in a long-term performance
plan. Metrics in the annual plan can be used to acknowledge incremental
improvement and reward specific actions that increase the pipeline and
engagement of qualified talent.
By selecting metrics carefully, setting goals based on
realistic assumptions, and rewarding both incremental progress and long-term
outcomes, companies can use executive compensation to support efforts to
improve workforce representation.
Mark Emanuel has 15 years of executive and
management compensation consulting experience with Semler Brossy. He advises
clients across industries with a depth of expertise in retail and
consumer-facing businesses and financial services. He particularly enjoys
helping companies navigate strategic transformation and turnarounds through
thoughtful metric selection and goal-setting. Mr. Emanuel holds a BS in
engineering from Harvey Mudd College.
While there is building momentum to adopt
ESG-related incentive metrics, it is important to consider the company’s
specific business and talent requirements before doing so. We encourage
companies to consider three factors:
1. Does an ESG Metric Need to Be Incorporated in Pay to
Reinforce Critical Priorities?
Many large companies already have a culture and/or system
separate from compensation that reinforces the importance of ESG progress
(e.g., external disclosures and internal dashboards) and may be sufficient to
drive the desired progress. For others, compensation might be important for
signaling priorities and establishing accountability—perhaps in response to
external pressure from a particular stakeholder constituency. In this case,
adopting an ESG-related incentive metric can have an outsized influence on
driving the desired behaviors.
2. What Objective Would the Company Achieve With an ESG
For many companies, meaningful ESG progress is an important
priority but subordinate to pressing financial and operational goals. In these
cases, an ESG metric may still help energize the culture around ESG but would
likely be best suited to a lower-prominence design (e.g., as a modifier).
However, if the organization has a real “burning platform” to make progress on
a given ESG metric, the company might consider a more prominent design such as
a standalone, weighted metric.
The selection of a specific metric—and its use in either the
short- and/or long-term incentive plan—should also squarely align with the
company’s current and future priorities. Companies should avoid selecting a
given metric to follow the pack.
3. Does the Company Have Enough History and Experience to
Set Meaningful Incentive Targets?
It is important that incentive goals—ESG-related or not—are
durable and can withstand shifts to the business strategy. Companies that are
relatively new to setting ESG-related goals may consider tracking a measure
through a pilot program before formally incorporating it in compensation. This
approach can help identify unintended consequences and the sensitivity of key
forecasting assumptions, and it allows the organization to refine
communications and initiatives that support the underlying priority.
Paul Benson is the Chief Human Resources
Officer and Corporate VP at Woodward, Inc., a global leader in energy
conversion and control solutions. Mr. Benson has previously been the EVP and
CHRO for Esterline Technologies and held progressively senior level HR roles
with Hewlett-Packard and Intel. Mr. Benson brings extensive experience with
mergers and acquisitions, strategic planning and complex global project
management. He holds an MBA in finance from Arizona State University.
Companies should evaluate and openly
acknowledge where they are currently with regard to ESG. Once that’s clear,
then they’ll want to identify where their most significant opportunities exist.
Keep it crisp. Don’t boil the ocean. Choose where your
company is going to focus, and put your efforts, your rewards and resources
around those. Don’t feel the need to have to move the needle on every possible
metric out there. Be clear with your employees as well as your stakeholders
where your focus will be and why.
ESG metrics are typically found within a couple of broad
buckets: sustainability-type goals and internal operational goals. When
analyzing potential ESG metrics, we need to consider which are geared more to
long-term value creation and which are more suitable to drive in shorter-term,
rapid improvement behaviors and initiatives. One dichotomy to navigate is the
fact that many ESG topical areas by nature lend themselves better to LTI
targets, as they tend to be long-term activities and outcomes (environmental
improvements, community impact, social issues, diversity and inclusion, etc.).
And those can become vague or ambiguous if not crafted well. But it’s important
to identify those shorter-term goals (safety, quality, customer and employee
satisfaction, etc.) that, when improved, also contribute to the greater good of
sustainability and long-term value creation.
Whether your focus will be on short- or long-term metrics,
or both, a key factor in setting ESG metrics is ensuring you’re able to
accurately capture, measure and internally report on whatever metrics you’re
setting. Additionally, think about your ability to transparently disclose your
metric and your progress against it. If you measure it, but aren’t able to
clearly describe it to the outside world and how you’re making it better, it’s
likely not the right metric.
Another element that should be discussed among the C-suite
and the board is, “What happens if we don’t achieve our ESG goals? What are the
potential ramifications?” While important to discuss and prepare for, it can’t
be a reason to not move forward with setting appropriate targets and driving