A New ESG Flashpoint: Executive Compensation

Not so long ago, corporations routinely came under fire for using bonuses to incentivize executives to make decisions that fattened the bottom line at the expense of environmental, social and governance concerns – known today as ESG. It didn’t matter so much if profits came from farming out manufacturing to countries with poor labor protections or pillaging natural resources.

Today, trends in compensation are turning 180-degrees. In response to pressure from both the public and investors, companies have started rewarding the C-suite for hitting marks on ESG measures. Best practices and guiding principles for making those awards remain in flux, however.

Attorneys from Proskauer Rose LLP weighed in recently with thoughts on incorporating ESG issues into compensation plans. Their advice for factoring ESG goals into pay packages included accounting for “how integral those goals are to the business, whether the achievement of those goals can be quantified and how long will they reasonably take to achieve.” They also encouraged companies to “set targets that are meaningful to the core of the business and make sense in the industry, that can be communicated clearly, and that are measurable.”

For the sake of optics, corporate executives should start getting used to the idea of giving up some of the perks to which they have become accustomed. For instance, corporate spending on private planes has increased two years in a row, up more than 20% last year to $41.3 million. Meta alone spent more than $6 million in 2022 on private jets for CEO Mark Zuckerberg and Sheryl Sandberg, the company’s former chief operating officer. With Covid-19 infections and travel restrictions receding around the world, trying to justify such expenditures is a tough sell. (Not to mention, if companies are touting their commitments to slashing carbon emissions, using private jets doesn’t square with their objectives.)

Meanwhile, some changes to the principles of executive compensation may fall outside the control of companies themselves. The Senate Banking Committee last month proposed legislation aimed at beefing up standards of corporate governance and the role of regulatory authorities in the financial sector. Among the measures in the bill, executives and directors at banking institutions would be subject to new requirements regarding risk management and internal controls. In cases where banks collapse and fall into receivership, the legislation would allow for the possibility of claw backs for bonuses and incentives given to senior executives in the preceding 24 months. That rule would apply even in instances where there is no evidence of wrongdoing or negligence on the part of the executives.

Naturally, boards of directors should also prepare for those cases in which they have to part ways with a top executive. Lawyers at Perkins Coie have a few tips for companies that find themselves in such a situation. What they say mainly boils down to encouraging corporations to be open and transparent about the process of removing executives, and taking the time to prepare a succession plan to address problems that could surface down the road.

For more information on trends in executive compensation, make sure to check out Intelligize’s new Board Profiles & Compensation offering.