Paid to perform

Bonnie Chen

An increasing number of multinationals are paying executives based on how well they perform on environment, social and governance goals.

Skeptics, though, say ESG-linked pay is neither transparent or quantifiable.

In 2011 just 1 percent of firms were using ESG metrics for executive pay, but by 2021 that figure had jumped to 38 percent, a research paper published by The Centre for European Economic Research in Germany last November found.

That report came just a month after a study from US think-tank The Conference Board found that the share of S&P 500 firms linking executive pay to ESG performance had grown from 66 percent in 2020 to 73 percent in 2021.

And firms tying corporate social responsibility to pay leaped 13 percentage points in three years to 20 percent in 2022 at Russell 3000 companies, according to Institutional Shareholder Services, which provides responsible investment solutions.

On average, pay links to ESG is about 15 percent of overall compensation as substantial ESG gains are unlikely to take place if the rewards are set too low.

For example, 20 percent of Schneider Electric chief executive's bonus is linked to the group's sustainability efforts on renewable electricity, anti-bribery and much more.

Disney made diversity and inclusion as the highest-weighted non-financial metric in its bonus plan in 2021.

For Starbucks, 10 percent of chief executive Kevin Johnson's bonus was tied to environmental provisions such as efforts to eliminate plastic straws and reduce farm-level methane, and another 10 percent was linked to retaining minority workers.

After achieving his targets, Johnson's pay jumped from US$14.7 million (HK114.6 million) in 2020 to US$20.4 million 2021.

In 2021, Apple said it would adjust bonuses by up to 10 percent either way depending on how well executives perform on ESG initiatives, but ISS criticized the move and this year, chief executive Tim Cook's compensation was slashed by more than 40 percent to US$49 million in 2023, on investor guidance and a request from Cook himself to adjust his pay.

Ticking the boxes

Critics say ESG is broad and vague and most pay metrics are not quantifiable and even when goals are specified such as carbon reduction and workforce diversity, some believe it is no more than a box-ticking exercise.

They say corporates pick goals randomly when setting up a pay mechanism, just to enhance their reputation rather than their commitment to ESG.

Also, the Principles of Responsible Investment of the United Nations found that utilities and extractive companies almost ignore the "environment" and the "governance" part with limited consideration of climate impacts, and pay little attention to the supply chain, but they'd rather focus on worker safety.

Some investors say executives have little accountability to their rewards and asset managers wonder if ESG-linked pay mechanism is a means for executives to get their bonuses even when they fail to achieve targets and share prices remain lackluster.

The UK-based ShareAction, which advocates responsible investment, argues that adding an ESG element to management rewards is not enough when there is such a big gap between the pay of executives and rank and file workers.

Amid all this, exaggerated ESG claims have prompted investors to shift from exclusion - which exposes them to bigger greenwashing risks - to best-in-class strategies, according to Trackinsight, a global exchange-traded fund market.

And only 4 percent of 18,000 investment products are qualified to market themselves as sustainable funds due to different rules and labeling requirement in the European Union, the UK and the US, research by Clarity AI, a sustainability technology platform, shows.