North American companies continue to link executive pay programs to ESG measures, WTW study finds

Rhea-AI Summary

WTW's global study reveals a growing trend of ESG measures in executive incentive plans across North America, Europe, and Asia Pacific. The adoption of ESG metrics in executive incentive plans has increased significantly, with companies in the U.S., Canada, Europe, and Asia Pacific incorporating ESG metrics in their short-term and long-term incentive plans. Metrics related to human capital remain the most popular, with environmental metrics also seeing a significant increase in adoption. WTW's study also highlights the rise of ESG metrics in Europe and Asia Pacific, with a focus on environmental and climate areas as well as human capital metrics.

Insights

Market Research Analyst

The integration of ESG metrics into executive incentive plans represents a significant shift in corporate governance and reflects the increasing pressure companies face from investors and regulators to prioritize sustainability and social responsibility. This trend is indicative of a broader movement within the investment community, where ESG factors are being recognized for their potential to influence long-term value creation and risk management.

From a market perspective, the adoption of ESG metrics may influence investor perceptions of a company's future performance and resilience. As companies embed ESG considerations into their incentive structures, they signal a commitment to aligning executive goals with broader stakeholder interests, which can enhance corporate reputation and potentially lead to a more favorable view among socially conscious investors.

Furthermore, the data indicating a nearly fourfold increase in ESG metrics within long-term incentive plans in Canada and the substantial growth in the U.S., suggests a strategic pivot towards long-term sustainability goals. This could have implications for stock performance, as firms that successfully integrate ESG practices may be better positioned to navigate future regulatory changes and societal shifts.

Financial Analyst

The report highlights a growing trend among companies to incorporate ESG metrics into executive compensation, which may have implications for company valuation and shareholder returns. As ESG-focused investing continues to gain traction, companies that proactively integrate these metrics may be rewarded with higher valuations due to perceived lower risks and better alignment with investor values.

However, investors should also consider the potential for unintended consequences. For example, the focus on non-financial ESG metrics could, in some cases, divert attention from traditional financial performance indicators. It is important to assess the balance between ESG and financial performance metrics in executive compensation to ensure that incentives do not inadvertently lead to suboptimal financial outcomes.

Additionally, the rise in ESG metrics adoption could lead to increased demand for ESG-related data and analytics services, as companies seek to measure and report on these new performance indicators. This could impact businesses that provide such services, potentially leading to growth opportunities in the ESG data sector.

ESG Strategy Consultant

The data underscores the strategic importance of ESG considerations in executive decision-making processes. Companies are increasingly recognizing that ESG performance can drive innovation, operational efficiency and employee engagement, which are critical components of long-term business success. As such, the integration of ESG metrics into incentive plans can serve as a catalyst for embedding sustainability into corporate culture and operations.

It is essential for companies to ensure that ESG metrics are material to their business and that they have robust systems in place to accurately measure and report on ESG performance. Companies that fail to do so may face reputational risks or accusations of 'greenwashing.' Therefore, the adoption of ESG metrics should be accompanied by transparent reporting and accountability mechanisms to maintain credibility with stakeholders.

The narrowing industry gaps in ESG metric usage, particularly in the IT and consumer goods sectors, reflect an understanding that ESG issues are not confined to traditionally high-impact sectors like energy or utilities. This trend may encourage cross-industry collaboration and benchmarking, leading to the development of best practices and standards for ESG integration.

NEW YORK, Jan. 24, 2024 (GLOBE NEWSWIRE) -- The adoption of environmental, social and governance (ESG) measures in executive incentive plans continues to increase across markets, including North America, according to a new global study by WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company. The number of U.S. public companies doing so continues to grow, and similar trends are occurring among companies in Canada, Europe and Asia Pacific, the study found.

In the U.S., more than three in four S&P 500 companies (76%) reported in this year’s proxies that they incorporated at least one ESG metric in their executive incentive plans, an increase from 69% the previous year and just 52% three years ago. While growth is occurring in both short-term incentive (STI) and long-term incentive (LTI) plans, most of the growth is happening in STI plans. In Canada, four in five TSX 60 companies reported using at least one ESG metric in their executive incentive plans, an increase from 68% three years ago. While ESG metrics are still much more commonly used in STI plans, the prevalence of ESG metrics in LTI plans has nearly quadrupled in the past three years.

Metrics related to human capital remain the most popular across all ESG categories, used by 70% of S&P 500 companies and 75% of TSX 60 companies. Environmental metrics saw a significant increase in adoption for both markets. Over the past three years, use of environmental metrics rose from 12% to 44% in the U.S. and from 27% to 50% in Canada. Within the environmental category, carbon emissions reduction is by far the most common metric.

“Companies’ interest in tying executive incentive plans to ESG measures is showing no signs of abating,” said Robert Newbury, senior director of the Global Executive Compensation Analysis Team, WTW. “In fact, we are seeing narrower industry gaps in the use of ESG metrics as we see increased adoption in the IT and consumer goods industries. The ongoing growth we are seeing reflects the continued focus from companies across markets and countries to articulate how ESG priorities are embedded in their business strategy and how they are seen as a key measure of non-financial performance.”

WTW’s study also included 328 companies across nine major indices in Europe as well as 264 companies across seven major markets in the Asia Pacific region.

The key findings from those companies include the following:

• The prevalence of ESG metrics within executive incentive plans continues to rise in Europe and Asia Pacific, increasing from 90% to 93% and from 63% to 77%, respectively.
• In Europe, the use of ESG metrics in LTI plans is common. The majority of European companies now include ESG metrics in their LTI plans, mostly in the environmental and climate areas. This represents a 35-percentage-point increase from 21% to 56% in the past three years.
• While Europe is ahead of North America in its emphasis on the environmental and climate areas, human capital metrics remain a top priority. In Europe, more than 80% of companies use at least one human capital metric in their executive incentive plans.
  

“We continue to see pressure from institutional investors to articulate how ESG and sustainability priorities drive long-term sustainable value creation. Meanwhile, North American companies are also seeing greater regulatory pressure on ESG-related disclosures. We expect a greater emphasis in identifying and measuring individual elements of ESG most impactful to businesses,” said Ken Kuk, senior director of Executive Compensation and Board Advisory, WTW.

About the study

This research study reviews public disclosures from 1146 companies listed in the S&P 500; TSX 60 in Canada; nine major European indices, including the FTSE 100; and the largest companies across seven markets in the Asia Pacific region.

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. Learn more at wtwco.com.

Media contacts

Ed Emerman: +1 609 240 2766
eemerman@eaglepr.com

Ileana Feoli: +1 212 309 5504
ileana.feoli@wtwco.com

FAQ

What is the main focus of WTW's global study?

WTW's global study focuses on the adoption of environmental, social, and governance (ESG) measures in executive incentive plans across markets, including North America, Europe, and Asia Pacific.

How many S&P 500 companies reported incorporating at least one ESG metric in their executive incentive plans?

More than three in four S&P 500 companies (76%) reported incorporating at least one ESG metric in their executive incentive plans.

What is the ticker symbol for WTW?

The ticker symbol for WTW is WTW.

What are the key findings from WTW's study in Europe and Asia Pacific?

The key findings include the rise of ESG metrics within executive incentive plans in Europe and Asia Pacific, with a focus on environmental and climate areas as well as human capital metrics.