The Handbook of Board Governance, 3rd Edition

43Questions Boards Should Discuss Before Adding or Modifying ESG Goals in Executive Incentives

Patrice Gélinas, ASA, CFA, BSc, MBA, PhD^1,2

Managing Partner at Hexarem Inc.

Overview

Boards of sizable companies who have not done so already face mounting pressure to tie executive pay to ESG goals because the trend appears inescapable. Indeed, more and more company boards shift from aligning executive pay with shareholder interest to aligning executive pay with the interest of multiple company stakeholders, such as employees, shareholders, creditors, regulators, humankind, and even all living things. This not routine work for a board of directors, and such a change in alignment should be considered, strategized, and implemented with adequate alignment, information, and diligence. This chapter is designed to guide board members who wish to understand the current landscape of ESG goals in executive incentives and consider implementation rooted in thoughtful guiding principles at their company.

We present market practices as of 2022, questions boards should discuss to seek alignment prior to incorporating ESG goals in incentive plans, a high-level roadmap to implementation, reasons to ensure common understanding of ESG nomenclature among board members and senior leaders, and a few traps to avoid.

Market Practices

Prevalence

The number of organizations incorporating ESG goals in executive compensation keeps growing. The majority of ESG goals are located in short-term incentive ...