US companies refine their approach to ESG metrics in executive pay programs, WTW study finds
NEW YORK, Dec. 16, 2024 (GLOBE NEWSWIRE) -- As environmental, social and governance (ESG) metrics become a common feature in executive incentive plans, U.S. companies are focusing more on setting metrics that are better aligned to their business priorities, according to a new global study by WTW (NASDAQ:WTW), a leading global advisory, broking and solutions company. The annual study also revealed the prevalence of diversity, equity and inclusion (DEI) metrics remained relatively stable despite recent backlash against corporate DEI initiatives.
In the U.S., more than three in four S&P 500 companies (77%) reported in this year's proxies they incorporated at least one ESG metric in their executive incentive plans. That's unchanged from the previous year but up sharply from 52% four years ago. Similarly, the number of companies using ESG measures in both short-term incentive (STI) and long-term incentive (LTI) plans remained unchanged at 75% and 9%, respectively.
Globally, 81% of companies incorporated at least one ESG metric in their executive incentive plan, a moderate increase from the previous year. Over three-quarters of global companies (77%) reported using ESG measures in their STI plans while 29% reported using ESG measures in their LTI plans.
Human capital metrics remain the most popular ESG metric category, used by 72% of S&P 500 companies and 73% of companies globally. Among U.S. companies, 57% use DEI metrics in their executive pay plans, including 26 companies that introduced the metrics this year. However, there were 29 companies that eliminated ESG metrics, and an additional six companies disclosed plans to remove DEI metrics in the current year.
"Despite some opposition on DEI goals and initiatives that some companies are experiencing, we see companies taking different approaches to DEI metrics," said Kenneth Kuk, senior director, Work and Rewards, WTW. "While prevalence of DEI measures may continue to decrease amid pushback on corporate DEI initiatives, the remaining ones will better withstand scrutiny because these companies made a compelling case for why DEI helps drive business results and preserve long-term sustainable value for stakeholders. We would caution against only discussing human capital and DEI within the narrow context of ESG metrics in executive incentive plans given their broader business impact."
WTW's study also found that among S&P 500 companies, ESG and non-financial metrics tend to yield about 10% higher payout than financial metrics. This may validate investors' concern that the level of rigor in goalsetting is not as robust with ESG metrics, especially when measurement is qualitative and discretionary.
WTW's study also included 311 companies across eight major indices in Europe and 193 companies across seven major markets in the Asia Pacific region.
The key findings from those companies include the following:
- Compared with the previous year, the prevalence of ESG metrics within executive incentive plans changed very little in Europe (94%) and Asia Pacific (74%).
- In Europe, nearly two-thirds (64%) use ESG metrics in LTI plans, an increase of several percentage points from the previous year. In Asia Pacific, just 30% use ESG metrics in LTI plans.
"With the use of ESG measures in executive pay plans plateauing, we expect investors and boards to focus on the quality of ESG metrics and those that are most material and relevant to the business, ensuring that they are objective, measurable, and underpinned by a robust goalsetting approach," said Kuk.
About the study
This research study reviews public disclosures from 500 companies listed in the S&P 500; the TSX 60 in Canada; eight 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.
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