Insights

Incentivizing Sustainability: ESG and Executive Compensation

Kira Ciccarelli

Incentivizing Sustainability: ESG and Executive Compensation

Listen to Episode 81 on Apple Podcasts

Guest: Shai Ganu, Managing Director and Global Leader of Executive Compensation and Board Advisory Services at WTW

Hosts: Dottie Schindlinger, Executive Director of the Diligent Institute, and Meghan Day, Senior Director of Board Member Experience for Diligent Corporation

In this episode:

  1. Tying ESG to Executive Compensation: Ganu talks through his latest project, a guidebook on how to effectively tie ESG goals and metrics to executive compensation.
  2. The Future of ESG and Executive Compensation: Ganu discusses the evolutions in the practice of tying ESG to executive compensation and where things are likely to move in the future.
  3. Challenges and Rewards: Ganu runs through some of the most challenging aspects of tying ESG to executive compensation and the possible opportunities companies can take advantage of in the process.

Summary:

In this episode of The Corporate Director Podcast, Shai Ganu, Managing Director and Global Leader of Executive Compensation and Board Advisory Services at WTW, takes a deep dive on aligning executive compensation to ESG metrics and strategy.

Trends in ESG and Compensation

Ganu mentions a partnership project he’s working on between WTW, WEF, and CGI: a guidebook to aligning ESG strategy, executive compensation, and larger climate transition priorities. He lays out the foundation:

  1. Start with your business strategy. Organizations who align incentive plans and ESG well use the KPI as a driver of their business strategy. More so for ESG, best practice should just be used as a reference. Instead, align to best fit.
  2. Consider your range of options. This helps to break the process down into smaller chunks. On aligning incentives to ESG metrics, you can begin at many different levels: Underpins, KPIs on individual scorecards, performance modifiers, KPIs in the STI plan, or KPIs in the LTI.
  3. Think about the long-term. More progressive companies have implemented a standalone incentive plan linked to achieving longer-term ESG priorities. Some of these goals take 5-10 years to change portfolios or reach DEI targets.

He goes on, “This process doesn’t happen overnight. The beauty of this process around ESG is that it’s actually changing the incentive model. Modern incentives are based on the premise that time is a constant and performance is variable. In some of these standalone plans, you say that performance is constant, and time becomes the variable.”

“This issue is complex and multi-faceted. Luckily, there is a wealth of knowledge available for companies when it comes to tying ESG to executive compensation.”

 -Shai Ganu, Managing Director and Global Leader of Executive Compensation and Board Advisory Services at WTW

The Future of ESG and Executive Compensation

Ganu discusses where ESG and executive compensation plans are likely to evolve in the future: “This will continue to be a priority in the next 1-5 years. ESG is not a ‘new’ concept. The Business Roundtable redefining the purpose of a corporation in 2019 was a watershed moment for stakeholder capitalism. My first LTI with a CO2 emission reduction goal was in Q2 2019, and the intent behind that was aligning their business priorities.”

Continuing, Ganu states, “Currently, if you think about ESG prominence, different geographies have had different focus areas. Last few years have been very focused on the ‘S’ in ESG in North America, particularly with the resurgence of the Black Lives Matter movement. Companies have reacted admirably with plans around pay equity, racial and gender representation.” He contrasts this movement with the rest of the world: “Interestingly, in Europe, the focus has been on the ‘E’. Now, it’s almost an expectation that executive comp programs will have alignment with decarbonization and larger climate goals. In the Asia Pacific region, Latin America, and East Africa, the focus more on the ‘G,’ with new codes of governance and board effectiveness.”

 In the next 12-24 months, Ganu predicts more cross pollination: “What starts in Europe and the UK will make its way to the US. Think this will happen with climate. The recent SEC proposal on climate disclosure is also going to head up these changes. When disclosure regimes get more pronounced, incentives is the next logical step.”

Eventually, Ganu hopes companies get to a point where they do not have to put any of these metrics in incentive plans: “Rather, making good on your ESG goals will be so well-integrated that this is part of your job as a CEO! You come to this work as a given rather than an incentive. Until we get to that point, incentives can be powerful to drive change for good.”

Challenges and Rewards

Many boards are concerned about putting ESG into their companies’ executive compensation plans because they’re harder to measure and achieve than financial metrics. Ganu responds to this fear: “We’ve heard both sides of this. We’ve also heard that ESG goals are too easy. Both arguments are valid. When we advise clients on this, we take the view that it’s not an exercise in changing the probability of achievements, and it’s not about making it harder or easier. It’s about getting science behind equivalent levels of difficulty, and this can be helped by analytical modeling.”

He ties the evolution of ESG metrics back to the beginning of the pandemic: “In the last few years, given the pandemic, a lot of boards and CEOs have welcomed these metrics. And they have not welcomed them because they’re easy, but because they have a strong modern and business imperative. In my opinion, there’s no such thing as true altruism when it comes to corporate ESG. they’re appreciating the tangible financial and nonfinancial benefits of setting and executing on ESG strategy.”

Also in this episode…

Ganu gives his bold prediction for the (distant) future of boardrooms: “I am a futurist and am optimist. Many years from today, I believe we could get to a point where we don’t even need boardrooms. We can make use of advancements in blockchain, decentralized governance, checking from third parties, and AI.”

Ganu believes that boards will have more AI, or maybe more boards where at least one director is an AI program: “This allows us to better contextualize the past to make better decisions for the future,” he says, “Expect AI connectors, and AI in the boardroom: facial recognition, recognizing drowsiness or boredom.”

He goes on, “Most boards today have two purposes: regulatory conformance and driving company performance. The third purpose is future-proofing: thinking 10-15 years out. Why boards have those roles, is, unfortunately, that public scrutiny has put a lot of pressure on the conformance side. Ten years from now, if we take care of conformance with the things I mentioned above, the role of the board becomes way more advisory to the CEO: Confidants, coaches, sounding board, counselors.

Resources from this episode: 

 

Related Insights

The Rising Tide of ESG – Navigating the Road Ahead

video

The Board's Role in Leading and Enabling GRC

article

Board and Executive Collaboration: Components of a Secure Platform for the Evolving Workplace

White Paper
Kira Ciccarelli
Kira Ciccarelli is the Lead Researcher at the Diligent Institute. Diligent Institute is the modern governance think tank and research arm of Diligent Corporation, the leading provider in board collaboration software. In her role, Kira works to conduct and provide high-level modern governance research to inform director decision-making and identify best practices.