In May 2019, comp consultant Mercer conducted a spot survey of 135 companies, looking at the prevalence and types of ESG (environmental, social and governance) metrics used in incentive compensation plans, including metrics related to the environment, employee engagement and culture, and diversity and inclusion. The survey found that 30% of respondents used ESG metrics in their incentive plans and 21% were considering using them. Mercer observes that with the “growing expectations for organizations to operate in an environmentally and socially conscious way, [ESG] incentive plan metrics are increasingly being considered as effective tools to reinforce positive actions.”
Of the respondents, 85 were based in the U.S. and 50 in Canada, and 93 were public, 33 private and nine non-profit or public sector. Participants included companies in a variety of industries, including energy (20%), manufacturing (13%), consumer goods (10%), mining (8%), banking/financial services (8%), life sciences and high tech (each 6%). Mercer noted that the survey results might be skewed somewhat because of the high proportion of companies in the energy sector, which tends to use ESG metrics more than others (52%). (Notably, 82% of mining and metals companies also use ESG metrics in their plans.) ESG metrics were used by 28% of respondents in their short-term incentive plans, most commonly environmental metrics (66%), followed by social metrics (employee engagement and culture) (37%), governance (diversity/inclusion) (18%) and other (most commonly employee health and safety) (13%). ESG metrics were used in only 9% of long-term incentive plans, again most commonly environmental metrics (67%) followed by social (58%) and 17% for governance. In the energy and metals and mining sectors, 96% used an environmental metric, compared to 22% for other sectors, while 76% of other sectors used a social metric, compared to only 22% for energy and mining.
Mercer also found that, in short-term incentive plans, ESG factors were assigned a weight of 5% or less in 33% of the cases, with 24% weighted at 5% to 10% and 22% weighted at 10% to 25%. For 15% of respondents, no weight at all was assigned to ESG factors, and only 6% weighted ESG factors more 25%. Compared to other ESG metrics, Mercer found, environmental metrics “are more likely to be assigned a weighting of more than 10% of the overall short-term incentive plan (36%).” For short-term plans, most ESG metrics (71%) were quantitative; only metrics related to diversity and inclusion were primarily qualitative (57%). For the most part, ESG incentives applied to all plan participants (75%); in only 18% of the cases were ESG metrics limited to senior executives. However, for social metrics, 29% were limited to senior executives and 43% of governance metrics were so limited.
With regard to long-term incentive plans, Mercer found that 33% of ESG metrics were not assigned any weight and 33% were assigned weights between 5% and 10%; 17% were weighted at levels over 25%. Of the ESG metrics, 38% of environmental metrics were assigned no weight and 38% were weighted between 5% and 10%. With regard to social metrics, 43% were weighted between 5% and 10% and 29% weighted at less than 5%. With regard to all ESG metrics in long-term plans, 39% were qualitative and 61% were quantitative, with 75% or environmental metrics being quantitative. As in short-term plans, most ESG metrics applied to all plan participants (72%), although 43% of social metrics were limited to senior executives.