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Most businesses apply ESG targets to share-based employee compensation

Discover how global companies are integrating environmental, social, and governance (ESG) targets into employee compensation plans.

ESG targets typically focus on lowering CO2 emissions, creating more diverse workplaces and improving corporate governance.

Almost two thirds (60%) of companies around the world who responded to the survey* said that they apply environmental, social and governance (ESG) targets to share-based employee compensation.

The survey had revealed that the most common areas for such targets are:

  1. CO2 reduction
  2. Diversity
  3. Corporate governance, including ESG issues.

Of companies that reported that they apply ESG targets, 84% said that they apply them to the management board. These targets set the strategic direction of the company for its board members, who use it to guide their implementation of day-to-day operations.

40% of companies that reported they use ESG targets said they apply them to short‑term incentive plans (STIs), which companies are increasingly offering to a wider range of employees in order secure talent and lock in innovation.

By comparison 30% of companies said they apply ESG to long-term incentive plans (LTIs), which are typically used to incentivize executives.

Overall 18% of companies said they were applying ESG targets to both plan types, while 13% said that, although they didn’t currently use ESG targets, they were considering introducing them.

The findings of the survey suggest that low performing companies are more likely to only apply ESG targets to their LTIs than high performers: 20% of ‘low performers’ said they had compared with just 11% of companies noted as high performing.

Sheila Frierson, President, Plan Managers NA at Computershare, one of the report’s sponsors, said: “More and more companies worldwide are working hard to figure out how they can best embed ESG principles into employee compensation, including employee equity plans.

“Companies will aim to implement systems that best align the goals of the company, such as reducing their environmental imprint or increasing employee diversity.

“Their approach will also be influenced by relevant jurisdictional ESG regulations including The EU’s Sustainable Finance Disclosure Regulation (SFDR) or voluntary guidance such as Australia’s principles for responsible investment.”

84% of companies who responded to a survey question on environmental targets said that they have applied targets related to reducing such emissions.

Social targets

The report added that 40% of respondents said they were applying social targets to the increasingly high-profile issue of employee diversity.

The report said that 30% of companies in NA apply targets related to gender diversity in management positions, with 70% of companies in the region applying targets related to diversity in general.

22% of companies have created targets for the reductions of accidents; that figure rises to 33% for firms outside Europe or North America, suggesting the issue is most acute for countries where health and safety regulations are still rapidly evolving.

Governance targets

39% of companies are applying corporate governance targets to ESG instruments, with that figure rising to 67% in NA, according to the report. 28% of companies are focusing on stakeholder relationships while a further 17% are incorporating targets relating to sustainable supply chains.

The issue of supply chain sustainability appears to be more prominent in Europe, with 22% of companies on the continent incorporating such targets into supply lines.

Influencing factors

The research also shows that institutional investors and proxy advisors have a significant influence on responding companies’ ESG targets, with more than half (62) saying that they have a medium-to-high influence.

Whilst most NA companies (42%) surveyed described institutional investors and proxy advisors as having a ‘medium’ influence on the targets, most European companies (43%) said that their impact was ‘high’, reflecting the increasing influence of proxy advisers on European organisations.

The report also points out that 38% of companies questioned publish ESG reporting information within the annual report and that many also publish using other channels.

32% of companies still don’t report on ESG topics in relation to LTIs, it added.


 

*Global Equity Organization’s (GEO) Global Equity Insights Survey (GEIS)

1: The survey took place between November 2022 and February 2023 and questioned 184 companies in NA (40%), Europe (52%) and the rest of the world (8%).

2: The top three industries represented in the study include: technology, consumer discretionary and industrials.

3: Around 95% of participants had an individual market capitalisation of above $1bn.

4: All monetary values are in USD.

5: The study categorised low and high performing companies by their Total Shareholder Return (TSR), or the calculation of the overall appreciation of the stock’s price and any dividends the company pays. The study further calculates high performers to be the top 33% of performers relative to TSR and the bottom 33% to be low performers.

5: Whilst the study questions 184 companies in total, answering every single question is not mandatory. As a result, the numerical value of responses on each question does not have to show 184.

6: The Global Equity Organization (GEO) is a globally operating non-profit, founded and driven by its members to advance global understanding of equity compensation. GEO offers opportunities for professionals worldwide to share and learn about strategic, financial, legal, and cultural aspects of equity-based employee compensation.

7: The Global Equity Insights Survey (GEIS) is a leading global assessment of current market practice and trends regarding equity-based compensation across the world.

GEIS was first conducted in 2013 as a survey project of the Global Equity Organization (GEO). The project, now in its twelfth year, is conducted annually and benefits from regular participation from some of the most prominent companies from around the world, large and small, providing participants with the latest market intelligence.

The research was also sponsored by Fidelity, hkp/// group, SAP, Siemens Energy, University of Göttingen and Vialto.

globalequity.org/surveys/geis-2023

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