4 in 5 Companies to Change ESG Measures in Executive Pay Plans over Next 3 Years: WTW

Global events such as the pandemic, economic uncertainties, and social and racial injustice are sparking companies around the world to maintain or accelerate changes to their environmental, social and governance (ESG) priorities, according to a new survey of boards of directors by Willis Towers Watson, a leading global advisory, broking and solutions company.

Source: Willis Towers Watson | Published on December 10, 2020

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“With institutional investor interest in ESG and sustainable investing increasing, companies are maintaining or accelerating their focus on ESG initiatives,” said Shai Ganu, global head, Executive Compensation, at Willis Towers Watson. “We know from our research and consulting that companies’ focus is on a stronger alignment of executive compensation plans and ESG priorities, particularly with climate change and environmental measures, inclusion and diversity matters, and overall human capital governance.”

Indeed, nearly four in five respondents (78%) are planning to change how they use ESG with their executive incentive plans over the next three years. More than four in 10 (41%) plan to introduce ESG measures into their long-term incentive plans over the next three years, while 37% plan to introduce ESG measures into their annual incentive plans. Additionally, about a third plan to raise the prominence of environmental and social/employee measures in their incentive plans.

The survey identified challenges companies face with using ESG metrics in incentive plans. Among the greatest challenges cited by respondents are target setting (52%), performance measure identification (48%) and performance measure definition (47%).

In North America, nearly three-quarters of respondents (73%) have implemented at least one initiative to promote inclusion and diversity at their organizations with another quarter planning or considering doing so. About four in 10 companies (43%) have conducted a pay equity analysis. Just under half (46%) have established or have supported internal inclusion and diversity networks, and another 32% are planning or considering doing so. And 44% have increased their communication of policies and benefits that promote an inclusive culture.

Employers are also taking various measures to review their workforces through an ESG lens. Nearly half (46%) said they have deployed listening strategies to engage with their employees, while three in 10 have created a new executive role to drive ESG strategy and have identified new positions in their organizations to help achieve their ESG strategy. Nearly half of respondents are either planning to review their culture to ensure ESG is embedded throughout their organizations or are considering doing so in the future. In addition to culture, about one in five respondents are expected to add board and/or compensation committee oversight of wellbeing and fair pay within the next three years.

Overall, while most companies are developing ESG implementation plans (84%) or have identified ESG priorities (81%), less than half (48%) have incorporated ESG plans into all aspects of their businesses — strategy, operations, and products and services offerings, indicating that companies are on different parts of their ESG journey. Over half (53%) are accelerating their ESG priorities and timing. Over three in four respondents (78%) believe ESG is a key contributor to stronger financial performance.

“Although companies are revising their use of ESG measures to support their executive pay programs, it appears more work needs to be done,” said Ryan Resch, managing director, Executive Compensation, Willis Towers Watson. “Boards have been asking for more information on ESG strategies and priorities, particularly in the areas of the environment and employee diversity, to understand their alignment to sustainable value creation and materiality. Their goal is to support the identification of the right measures for their incentive plans with appropriate performance targets.”

About the survey

The 2020 ESG Survey of Board Members and Senior Executives was conducted during September and October 2020. The survey results are based on responses from non-executive and executive directors, and non-board member management executives at 168 organizations throughout North America, Europe, Asia, Africa and the Middle East. Respondents employ 2.2 million workers.

About Willis Towers Watson

Willis Towers Watson is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.