Four-in-five companies planning to change ESG measures in executive pay plans over next three years, says Willis Towers Watson survey

Global events including the pandemic, economic uncertainties, and social and racial justice are sparking companies around the world to accelerate changes to their Environmental, Social and Governance (ESG) priorities, according to a new survey of boards of directors by Willis Towers Watson. 

“With investor and shareholder interest in ESG and sustainable investing increasing, companies are accelerating their focus on ESG initiatives,” says Shai Ganu, global head of executive compensation at Willis Towers Watson. “We know from our research and consulting that companies’ greatest 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, four in five respondents (78 per cent) are planning to change how they use ESG with their executive incentive plans. More than four in ten (41 per cent) plan to introduce ESG measures into their long-term incentive plans over the next three years while 37 per cent plan to introduce ESG measures to 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: target setting (52 per cent), performance measure identification (48 per cent) and performance measure definition (47 per cent).
Employers are also taking various measures to review their workforce through an ESG lens. Nearly half (46 per cent) said they have deployed listening strategies to engage with their employees, while three in ten have created a new executive role to drive ESG strategy and have identified new positions in their organisations to help achieve their ESG strategy.

Nearly half of respondents are either planning to review their culture to ensure ESG is embedded throughout their organisations 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 per cent) or have identified ESG priorities (81 per cent), less than half (48 per cent) 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 per cent) are accelerating their ESG priorities and timing because of moral and ethical reasons and to increase their organisations’ long-term value.  Over three in four respondents (78 per cent) believe ESG is a key contributor to stronger financial performance.

“In the UK, although some companies are revising their use of ESG measures to support their executive pay programs and overall inclusion and diversity initiatives, more work needs to be done,” says Jessica Norton, UK Executive Compensation Practice Leader, Willis Towers Watson. “We expect that the level of interest and involvement of more organisations will only rise as investors, consumers and employees increasingly press companies for a strong commitment to ESG as well as hold their CEOs more accountable.”