78% of employers will change ESG use in executive pay strategies

Nearly four-fifths (78%) of employer plan to change the way they use environmental, social and governance (ESG) measures in their executive incentive strategies, according to research by Willis Towers Watson.

Its 2020 ESG survey of board members and senior executives, which was conducted in 168 organisations throughout Europe, North America, Asia, Africa and the Middle East, found that global events such as the Covid-19 (Coronavirus) pandemic, economic uncertainty, and social and racial justice, are causing employers to speed up changes to their ESG priorities.

The research found that employers are keen to have a greater alignment of executive compensation plans and ESG issues, such as climate change, and inclusion and diversity matters.

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The survey found that 41% of employers plan to introduce ESG measures into their long-term incentive plans (L-tips) over the next three years, and 37% plan to introduce these measures into their annual incentive plans.

However, employers face some challenges with using ESG measures in their incentive plans: the survey found that the greatest challenges are target setting (52%), performance measure identification (48%), and performance measure definition (47%).

The survey also found that employers are planning to put in other ESG measures within their organisations. Around one in five are expected to add board or compensation committee oversight of wellbeing and fair pay within the next three years, and almost half (46%) have introduced listening strategies to engage with their employees. Three in 10 have created an executive role to drive the ESG strategy.

Most organisations are developing ESG implementation plans (84%) or have identified ESG priorities (81%), but just under half (48%) have incorporated ESG plans into all aspects of their businesses: strategy, operations, and products and services offerings.

Jessica Norton, UK executive compensation practice leader at Willis Towers Watson, said: β€œIn the UK, although some [organisations] are revising their use of ESG measures to support their executive pay programmes and overall inclusion and diversity initiatives, more work needs to be done.

β€œWe expect that the level of interest and involvement of more organisations will only rise as investors, consumers and employees increasingly press [organisations] for a strong commitment to ESG, as well as hold their CEOs more accountable.”