US companies refine their approach to ESG metrics in executive pay programs, WTW study finds

Rhea-AI Summary

WTW's latest global study reveals U.S. companies are refining their approach to ESG metrics in executive compensation, focusing on better business alignment. 77% of S&P 500 companies included at least one ESG metric in executive incentive plans, unchanged from last year but up from 52% four years ago. Despite recent DEI backlash, 57% of U.S. companies maintain DEI metrics, with 26 companies adding and 35 removing or planning to remove such metrics.

The study found that ESG metrics yield about 10% higher payout than financial metrics among S&P 500 companies, raising concerns about goalsetting rigor. Globally, 81% of companies use ESG metrics, with 77% implementing them in short-term incentives and 29% in long-term incentives. Human capital metrics remain most popular, used by 72% of S&P 500 companies and 73% globally.

NEW YORK, Dec. 16, 2024 (GLOBE NEWSWIRE) -- As environmental, social and governance (ESG) metrics become a common feature in executive incentive plans, U.S. companies are focusing more on setting metrics that are better aligned to their business priorities, according to a new global study by WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company. The annual study also revealed the prevalence of diversity, equity and inclusion (DEI) metrics remained relatively stable despite recent backlash against corporate DEI initiatives.

In the U.S., more than three in four S&P 500 companies (77%) reported in this year’s proxies they incorporated at least one ESG metric in their executive incentive plans. That’s unchanged from the previous year but up sharply from 52% four years ago. Similarly, the number of companies using ESG measures in both short-term incentive (STI) and long-term incentive (LTI) plans remained unchanged at 75% and 9%, respectively.

Globally, 81% of companies incorporated at least one ESG metric in their executive incentive plan, a moderate increase from the previous year. Over three-quarters of global companies (77%) reported using ESG measures in their STI plans while 29% reported using ESG measures in their LTI plans.  

Human capital metrics remain the most popular ESG metric category, used by 72% of S&P 500 companies and 73% of companies globally. Among U.S. companies, 57% use DEI metrics in their executive pay plans, including 26 companies that introduced the metrics this year. However, there were 29 companies that eliminated ESG metrics, and an additional six companies disclosed plans to remove DEI metrics in the current year.

“Despite some opposition on DEI goals and initiatives that some companies are experiencing, we see companies taking different approaches to DEI metrics,” said Kenneth Kuk, senior director, Work and Rewards, WTW. “While prevalence of DEI measures may continue to decrease amid pushback on corporate DEI initiatives, the remaining ones will better withstand scrutiny because these companies made a compelling case for why DEI helps drive business results and preserve long-term sustainable value for stakeholders. We would caution against only discussing human capital and DEI within the narrow context of ESG metrics in executive incentive plans given their broader business impact.”

WTW’s study also found that among S&P 500 companies, ESG and non-financial metrics tend to yield about 10% higher payout than financial metrics. This may validate investors’ concern that the level of rigor in goalsetting is not as robust with ESG metrics, especially when measurement is qualitative and discretionary.

WTW’s study also included 311 companies across eight major indices in Europe and 193 companies across seven major markets in the Asia Pacific region.

The key findings from those companies include the following:

• Compared with the previous year, the prevalence of ESG metrics within executive incentive plans changed very little in Europe (94%) and Asia Pacific (74%).
• In Europe, nearly two-thirds (64%) use ESG metrics in LTI plans, an increase of several percentage points from the previous year. In Asia Pacific, just 30% use ESG metrics in LTI plans.

“With the use of ESG measures in executive pay plans plateauing, we expect investors and boards to focus on the quality of ESG metrics and those that are most material and relevant to the business, ensuring that they are objective, measurable, and underpinned by a robust goalsetting approach,” said Kuk.

About the study

This research study reviews public disclosures from 500 companies listed in the S&P 500; the TSX 60 in Canada; eight major European indices, including the FTSE 100; and the largest companies across seven markets in the Asia Pacific region.

About WTW

At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.

Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you. Learn more at wtwco.com.

Media contacts

Ed Emerman: +1 609 240 2766
eemerman@eaglepr.com

Ileana Feoli: +1 212 309 5504
ileana.feoli@wtwco.com

FAQ

What percentage of S&P 500 companies use ESG metrics in executive compensation according to WTW's 2024 study?

According to WTW's 2024 study, 77% of S&P 500 companies incorporate at least one ESG metric in their executive incentive plans.

How much higher are ESG metric payouts compared to financial metrics in S&P 500 companies?

ESG and non-financial metrics tend to yield about 10% higher payout than financial metrics in S&P 500 companies.

What is the current trend in DEI metrics adoption among U.S. companies in 2024?

57% of U.S. companies use DEI metrics, with 26 companies introducing them and 35 companies either removing or planning to remove them in 2024.

How do global ESG metric adoption rates compare to U.S. rates in 2024?

Globally, 81% of companies use ESG metrics compared to 77% of S&P 500 companies, with 77% using them in short-term incentives and 29% in long-term incentives.

What is the most commonly used ESG metric category according to WTW's study?

Human capital metrics are the most popular ESG metric category, used by 72% of S&P 500 companies and 73% of companies globally.