More organizations are proceeding tactfully when it comes to designing incentive plans for executives, according to Mercer’s “2019 ESG Spot Survey.”
Perhaps due to growing expectations, 51% of companies are either using or considering using environmental, social and governance (ESG) metrics when designing their executive compensation packages to hold leadership accountable for the delivery of sustainable business goals.
Mercer’s study, which was conducted in May, examines the prevalence and types of ESG metrics, including environmental factors, employee engagement, company culture, and diversity and inclusion. A total of 135 public, private and not-for-profit companies from the United States and Canada participated in the survey.
Among respondents using ESG metrics, the metrics comprise approximately 5% of all incentive plan metrics, but usually apply beyond senior executives to all incentive plan participants. Despite their small relative weight in determining payouts, incentive plans that utilize ESG metrics can be designed to reinforce desired behavior across a company’s workforce.
“Given that organizations track an innumerable amount of metrics in running their businesses, but typically include only a handful in their incentive plans, the inclusion of ESG metrics is significant,” said Peter Schloth, principal with Mercer. “ESG incentive plan metrics alone would likely not create lasting change, but they are an effective mechanism to signal what is important to the organization and to reinforce other efforts aimed at fostering a culture that encourages employees to meet growing expectations that organizations operate in an environmentally and socially conscious way.”
Mining and Metals and Energy Sectors Lead the Pack
Mercer’s survey finds that ESG metrics are most commonly used by companies in the mining and metals (82%) and the energy (52%) sectors. Respondents in the technology sector were least likely to use or consider using ESG metrics.
Metrics Vary by Industry
Companies in the mining and metals and energy sectors are much more likely to use an environmental metric (96%), according to the survey findings. Employee engagement/culture is the most prevalent metric for all other sectors (76%), followed by diversity and inclusion (35%).
“The high usage of environmental metrics in the mining and metals and energy sectors is not surprising, since their dynamic business models are increasingly reliant on the diligent use of natural resources while protecting the environment,” said David Cahn, principal with Mercer. “More companies are expected to evaluate ESG performance frameworks as stakeholders engage in discussions about sustainability. Concurrently, effective deployment and engagement of human capital remains central to value creation in all sectors.”