A majority of companies in the S&P 500 – albeit a slim majority – use sustainability as one of their metrics for determining executive compensation, according to an analysis by GMI Ratings.
The research firm found that 53.8 percent of S&P 500 companies tie sustainability metrics such as workplace safety, environmental impact and employee engagement to executive pay.
While a majority of companies in the S&P 500 incorporate sustainability factors into executive compensation decisions, GMI Ratings found that only 16 percent of those firms name specific metrics that they use to measure performance, and only 10 percent disclose specific sustainability targets in compensation plans.
In its new report, “Sustainability Metrics in Executive Pay,” GMI Ratings concludes that there’s “much room for improvement in the manner companies are incorporating sustainability factors into executive compensation.”
“At present, only about 10 percent of company boards require the CEO to satisfy a sustainability target in order to earn a portion of a bonus, and just a handful of companies assess sustainability performance in conjunction with long-term awards,” the report says. “Yet as shareholders continue to insist that companies be held [accountable] for their impact on the environment and the safety of their employees, it’s reasonable to ascertain that boards will push for an increase in the application of [sustainability] metrics in determining executive pay.”
Through its analysis of S&P 500 companies’ annual proxy statements, GMI Ratings found that over 90 percent of energy and utility companies use sustainability metrics to determine a portion of executive pay, compared with less than 40 percent of telecommunications, technology and cyclical consumer goods and services companies.
The report notes that utility companies “are leading the way towards a meaningful incorporation of sustainability metrics into executive pay.”
“With three-fourths of companies in this sector utilizing sustainability metrics and 57 percent setting specific targets to achieve for bonus payouts, it’s clear that boards of utility companies recognize that the health and safety of its employees are meaningful drivers of performance and underline this to management through these pay programs,” the report says.
“It stands to reason that as boards continue to put a greater emphasis on sustainability metrics with regards to executive payouts, senior company leaders will be forced to improve rates of workplace safety, reduced emissions, and increased customer satisfaction.”