Companies across the industry are heavily promoting their efforts to look beyond shareholders as they take a broader view of their responsibilities as corporate citizens. Still, when it comes time to put together CEO pay packages, the bulk of the money usually comes from stock and options awards tied to longer-term financial targets that would keep Wall Street happy over a three-to-five-year time span.
That is starting to change.
The numbers are still small, with companies that do link purpose to pay typically tying it to only 10 to 15 percent of a CEO’s typically multimillion dollar bonus. But compensation experts said the change is coming relatively fast — relative to the pace pay trends shift — and is just one of the outward signs of intense boardroom discussions helping to reshape corporate America.
“We are seeing a fair amount of movement on the inclusion of ESG metrics into incentive plans,” said Jannice Koors, senior managing director and Western region president at executive compensation consultancy Pearl Meyer. “It is still not majority practice, but it is certainly significant minority practice.
Forty-one percent of companies in the S&P 500 included some kind of an environmental, social or governance target in senior executives’ pay packages last year, Koors said. That’s up from 35 percent a year earlier. On the broader scene, there’s more work to do as she said only 22 percent of Russell 3000 companies incorporated ESG targets in pay.
“I would expect both of those numbers to continue to creep up,” Koors said. “The fact that companies are talking about it and that conversation has been elevated to the board level is a necessary first step.
“You kind of have to give companies credit for the good college try [on pay so far],” Koors said. “At some point, we’re going to be far enough down this path and there are going to be enough examples and the marketplace will be determining that companies will have had enough time to figure out what metrics are important to their businesses.”
That puts executive pay still squarely under the sway of shareholders, with the twist that investors are caring more about ESG issues than ever, pumping trillions of dollars into investment vehicles devoted to the area.
“Let’s be really honest — not all stakeholders are created equal and shareholders are still going to get first dibs,” Koors said. “As a senior management team, you’re not going to get a whole lot of sympathy or a whole lot of leeway if you’re doing all this good corporate citizen stuff but you’re not delivering a return.”
Megamillion dollar pay packages for corporate honchos always stir up a mixture of indignation, bafflement and concern over a growing class divide.
In part, that’s because the pay at the top is good — very good.
A WWD survey of the largest fashion and retail companies found 14 executives who logged total compensation of more than $10 million last year — amid a pandemic that saw millions lose their jobs or be laid off temporarily — including stock options and awards that rely on company performance and have only a theoretical value until they’re cashed in.
Two executives scored pay packages above $20 million — Doug McMillon, president and CEO of Walmart Inc., at $22.6 million, and Sonia Syngal, CEO of Gap Inc., at $21.9 million, during her first year in the corner office.
But purpose is starting to creep into pay.
At Macy’s Inc., 70 percent of incentive pay for top executives is tied to earnings before interest, taxes, depreciation and amortization and sales, while the balance is split up between gross margin dollars, omninet promoter score and a culture index, including colleague engagement and diversity.
VF Corp. also factors inclusion and diversity into its incentive pay.
Others are moving in that direction.
At Lululemon Athletica Inc., performance-based cash incentive awards last year were tied to operating income and net revenue. But the company said, “For fiscal 2022, we are considering the addition of an environmental, social, governance, or ESG, component to our bonus plan given the importance of this to Lululemon.”
The corporate world is in the midst of a major cultural transformation that, however halting, is moving forward.
And as companies move toward a higher purpose, they are taking a closer look within, appointing chief diversity officers, generating sustainability reports, engaging with activists and taking stock. They are data gathering — a transition that mirrors the AI- and data-powered remake of the rest of operations, from merchandising to logistics.
Matt Vnuk, partner of Compensation Advisory Partners, said: “Companies are first figuring out, where are they now? How do we feel about that? And where do we want to be over what time frame?”
And then they have to look at the issue in the U.S. and/or globally and work through the complications.
While carving out a small part of a bonus that itself is part of a multimillion-dollar pay package can seem like only a slight nod to purpose, Vnuk argued it’s enough to move the needle.
“I think they’re moving fairly quickly,” he said of companies in general. “Having a metric will immediately create more discussion on these topics between the CEO and the board. It’s the board, the CEO agreeing [that] there’s more to success than two to three financial metrics alone and there’s broad acknowledgement of that.”
That acknowledgement is key, but it’s still just a starting point, or a continuation of a conversation that’s been going on for some time.
“These non-financial types of metrics, they’ve been tossed around for discussion — they just have a larger serving at the table now,” said Amit Batish, director of content and communications at consultancy Equilar. “A lot of that has to do with the fact that there’s shareholder pressure.”
In particular, Batish said the pandemic had companies focusing on their employees.
Social pressures have also been building, with the reinvigoration of the Black Lives Matter movement after George Floyd’s murder at the hands of police, a growing emphasis on the LGBTQ community, the environment and more.
That’s a world of change for companies to keep up with and CEO pay is just one, high-profile lever to nudge companies along.
“It’s still very early at this stage,” Batish said. “It’s hard to say what the early trends are, what good practices are. Companies are discussing it, but whether they’re following through and accurately measuring executives on these metrics, that’s still up in the air. But investors and stakeholders are starting to pay closer attention. Definitely, there is real change coming.”
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