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ESG measures in executive incentive plans gaining momentum, WTW study finds

December 15, 2022

ESG and Sustainability
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ARLINGTON, VA, December 15, 2022 — Faced with mounting pressure from investors, customers, regulators and employees, more U.S. public companies are incorporating environmental, social and governance (ESG) measures in their executive compensation programs, according to a new global study by WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company. Similar trends are occurring among European and Canadian companies, the study found.

Seven in 10 S&P 500 companies (69%) reported in this year’s proxies that they use at least one ESG metric in their executive incentive plans, an increase from the 60% they reported last year. And growth is occurring in both short- and long-term incentive plans. According to the study, two-thirds of companies (67%) tie their short-term incentive plans to at least one ESG measure, up from the 59% they reported last year, while the number of companies that use at least one ESG measure in their long-term incentive plans rose from 5% to 8%.

The most prevalent measures U.S. companies are using in incentives plans are social metrics (66%), which incorporate multiple sub-categories, including human capital and customer service. Nearly four in 10 companies (38%) use governance measures that focus on such areas as risk management and corporate social responsibility. One-fourth of companies (25%) incorporate environmental measures that address areas such as climate change, carbon emission reduction and responsible use of natural resources.

We expect further development in the measurement, reporting and governance of ESG metrics in the next few years.”

Kenneth Kuk | Senior director, Executive Compensation and Board Advisory, WTW

“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,” said Kenneth Kuk, senior director, Executive Compensation and Board Advisory, WTW.

Indeed, the study found one in six companies plans to amend its use of ESG measures in incentive plans. Seven percent of companies that already use ESG measures plan to add more metrics or increase their weighting, while 5% will modify which metrics they use. Another 5% intend to incorporate an ESG measure in their incentive plans for the first time.

“Advances in climate transition such as carbon emission reduction will be a main area of development globally,” said Shai Ganu, global practice leader, Executive Compensation and Board Advisory, WTW. “Leading global companies are monitoring developments across different regions and adapting their programs accordingly. For example, nearly one in two companies in Europe have an ESG measure in their long-term incentive plans, which is significantly higher than other parts of the world. We believe that adopting ESG metrics for executive incentives is a best practice, and we continue to advocate the alignment between ESG priorities and business strategy.”

A total of 326 companies throughout Europe and the U.K., along with 60 companies in Canada, were also included in the study. The key findings from those companies include:

  • 90% of European companies include at least one ESG measure in their executive incentive plans, an increase from the 79% they reported using last year.
  • The use of ESG metrics in European long-term incentive plans has more than doubled in the past two years, reaching 44% this year.
  • Prevalence of environmental measures at European companies has increased the most over the past few years, rising from 37% to 65%.
  • Eight in 10 Canadian companies this year reported using at least one ESG measure in their executive incentive plans, up 3% from the previous year.
  • Social measures are the most prevalent currently used by Canadian companies (78%). Environmental and governance measures are used in about four in 10 plans.
  • More changes are on the horizon throughout Europe and Canada. Nearly four in 10 European companies (38%) and 25% of Canadian companies plan to introduce an ESG measure or expand or modify their use of ESG measure in executive incentive plans.

About the study

This research study reviews public disclosures from 900 companies listed in the S&P 500, TSX 60, FTSE 100 and nine other major European indices. WTW expects to release additional data from public companies across several Asia Pacific countries in the first quarter of 2023.

About WTW

At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.

Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you.

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