Companies Are Linking ESG Goals to Bonus Compensation

An article posted on the CNBC website Mat 14, 2023, written by Ian Thomas, points out that he political debate around corporate focus on environmental, social and governance issues is nowhere near over, but more C-suites and corporate boards are putting their own money where their mouths are when it comes to the importance of these strategies. Companies are increasingly linking ESG metrics to executive compensation packages.

According to the article, nearly half of the Russell 1000 (43%) disclose that they use ESG-related key performance indicators in executive compensation metrics, according to data from Just Capital, a nonprofit that measures corporate stakeholder performance. That percentage of Russell 1000 companies linking ESG goals to compensation has quickly grown in recent years, from 14% in 2020 to 18% in 2021 to 28% in 2022.

“There’s an increasing recognition from boards and executives that assessing CEO performance should include profit and a more holistic, long-term set of non-financial but material indicators. Issues like human capital, environmental risk, and governance issues are connected to the health and competitiveness of the firm – and that’s what we’re seeing emerge in compensation packages,” said Just Capital chief strategy officer Alison Omens.

There’s also been a steady push from investors focused on these issues, none more prominent than BlackRock CEO Larry Fink. While Fink, under more pressure than ever as the anti-ESG political movement has targeted him, wrote in his annual letter to investors earlier this year that it’s “not for companies, including asset managers, to be the environmental police,” these issues are clearly viewed as material.

He added, “Investing for the long term requires taking a long-term view of what will impact returns, including demographics, government policy, technological advancements, and the transition to a low-carbon economy,” Fink wrote. “For years now, we have viewed climate risk as an investment risk. That’s still the case.”

Thomas notes that Chipotle has tied ESG goals to executive compensation since 2021, a measure that chief corporate affairs Officer Laurie Schalow said has helped not only make it “very clear” what the company’s priorities are but also helped the leadership team make “decisions that aligned with meeting those objectives.”

The goals, which this year can increase or decrease executives’ overall bonus payout by up to 15%, are centered around three areas that Chipotle has identified as important to meet its sustainability goals: food and animals, people, and the environment. For Chipotle executives to meet these goals, the company needs to purchase at least 37.5 million pounds of local produce, improve its diverse employee retention, and increase the number of restaurants with composting programs.

To date, Chipotle has reached all of the ESG-related compensation-linked goals it has set for executives, Schalow said, which have previously included upping the supply of local produce, increasing the diversity of its internal pipeline for promotions, and reducing its Scope 1 and 2 greenhouse gas emissions.
Ensuring that stakeholder or purpose strategies aren’t simply a C-suite initiative, Thomas writes, “but an effort that extends from the front-line to middle managers to senior executives, may help drive the connection to ESG goals for employees, putting further emphasis on senior leaders to support those strategies through training and integration efforts into existing operational functions.

For a whole lot more, see At Chipotle, Papa John's, the links between bonus pay and ESG grow (