Can C-suite paychecks save the world?

Can C-suite paychecks save the world?
Joel Makower
Tue, 03/09/2021 - 02:11

Last week, the fast-casual restaurant chain Chipotle Mexican Grill announced a new policy that ties executive compensation in part to environmental, social and governance (ESG) metrics. 

Going forward, 10 percent of the annual incentive bonuses for corporate officers — essentially, anyone with day-to-day responsibility for running the company — will be tied to the company’s progress toward achieving such goals as improving diversity, creating more opportunities for advancement amid Chipotle’s lower ranks and increasing the organic, local and regeneratively produced food served in its restaurants.

Chipotle is the latest company to spice up its executive pay packages to include social and environmental goals. In January, Apple announced it will incorporate ESG metrics into the annual cash incentives for company execs, using a formula to either decrease or increase bonus payouts by up to 10 percent.

The goal, per the company’s proxy statement : "to further motivate Apple’s executive team to meet exceptionally high standards of values-driven leadership in addition to delivering strong financial results."

What in the name of fringe benefits is going on?

Linking executive bonuses to sustainability metrics is making waves. But is it making a difference?

At long last, companies and their largest investors are recognizing that climate change, diversity and other sustainability issues represent risks to profits and productivity, and that companies that proactively manage these risks are better run and thus more attractive investments.

And where investors go, corporate boards of directors quickly follow in the form of carrots and sticks for a company’s top brass.

The trend to link ESG metrics to executive pay is a departure from traditional compensation packages, which have relied almost entirely on financial measures — earnings per share, revenue growth and other factors. Now, nonfinancial metrics are being folded into the mix, with a strong emphasis on climate change and diversity and equity issues.

The trend is just ramping up, especially in Europe, where the main focus is on climate change. U.S. companies are still mostly at the starting gate. A 2020 analysis of company public disclosures by Willis Towers Watson found that while about 11 percent of the top 350 European companies have linked greenhouse gas emissions to their executive incentive plans, only 2 percent of U.S. S&P 500 companies have done so, as Willis’ Nidia Martínez and Ryan Resch wrote recently on GreenBiz.

But a few U.S. companies have stepped up. In 2019, Clorox set a goal to tie executive compensation awards to elements of its ESG goals for members of its executive committee, including for the chair and CEO, although it hasn't yet announced details on how it will...