More than three quarters (78 percent) of large companies now include stakeholder-based metrics in their executive compensation plans, according to a global survey from Farient Advisors.
That figure is an increase from 73 percent in 2021 and 64 percent in 2020. Marked regional differences persist, however. Almost nine in 10 companies surveyed in continental Europe this year (88 percent) used stakeholder incentive measures, compared with 63 percent of those in the US and 62 percent of those in Canada.
The research incorporates large companies in Australia, Canada, continental Europe, Singapore, South Africa, the UK and the US. The most frequently used stakeholder incentives involve ESG metrics, but they also include considerations involving customers and community.
Brian Bueno, ESG leader at Farient, says fewer US companies are linking executive pay to ESG and other metrics than those in other regions in part because there is a shorter history of them considering ESG issues in general. In the EU, companies also face more regulations requiring climate risk disclosures.
In terms of investor expectations, there is still a focus in the US on corporate disclosures around issues such as climate change and diversity, equity and inclusion, Bueno says. The pressure then shifts to companies showing progress toward ESG goals, after which pressure builds to include ESG metrics in executive pay as a means to incentivize meeting those goals, he explains.
Bueno notes that over the past year some institutional investors have been formalizing their expectations around how issuers link ESG to executive pay. They do not necessarily expect companies to do so, but they expect those that do ensure the ESG metrics they use are relevant to the business, material to its long-term value and tied to rigorous targets, he says.
SPIKE IN ‘E’ METRICS
The use of environmental incentive measures has increased sharply over the past year, according to the research. It finds that 50 percent of companies surveyed globally use such measures in 2022, up 20 percentage points from last year. By contrast, social incentive measures have increased in use among firms from 67 percent of companies in 2021 to 72 percent of companies in 2022.
Bueno says the more widespread use of social measures is due to some companies having for many years used measures such as employee health and safety that now fall under the ‘social’ umbrella. Environmental measures are newer and thus have a sharper adoption growth rate.
There are wide regional differences in the use by companies of different types of metrics. Just over a third (34 percent) of US companies surveyed use environmental measures, compared with 60 percent of UK companies and 82 percent of those in continental Europe.
The survey also finds wide differences between industries. Globally, 95 percent of companies surveyed in the utilities sector use stakeholder incentive measures, followed by 94 percent of those in materials and 84 percent of those in the energy sector. At the other end of the spectrum, just over than half (54 percent) of IT companies, 64 percent of consumer discretionary companies and 67 percent of those in the consumer staples sector use such measures.
EXECUTIVE PAY FOCUS
Executive pay in general appears set for scrutiny in 2023. On one hand, growing numbers of investors are skeptical about companies’ say on pay. According to Farient, the number of large US companies receiving less than 90 percent support for say on pay rose from 17.9 percent in 2018 to 30.2 percent in 2022.
According to Bueno, say-on-pay trends will be particularly interesting amid falling markets as investors compare the value of target pay at the start of the year and performance pay at the end of the year. Widespread disconnects could lead to an increased number of companies getting poor say-on-pay results, he says.
On the regulatory front, the SEC in August adopted rule changes under which companies must now disclose information on the relationship between executive compensation ‘actually paid’ and the registrant’s financial performance.
The changes require issuers to create a table to report specified executive compensation and financial performance measures for their five most recently completed fiscal years. Governance professionals say complying with the changes has created a lot of work in the run-up to proxy season 2023.