Executive pay should reflect firms’ ESG goals

This article is part of
Winter Investment Monitor - December 2014

Fiona Reynolds is managing director at Principles for Responsible Investment

Study results: Extracting lessons from extractives

Principles for Responsible Investment recently looked at executive pay in the extractives sector – an area spanning oil, gas, mining and chemicals – as ESG factors are highly visible in these industries. This ESG exposure reflects the nature of work these firms undertake, where operations are internationally dispersed and, due to the often hazardous environments, involve a number of risk factors such as staff safety.

The study*, which included a review of public filings for 84 companies, showed that 83 per cent of firms incorporated some type of ESG issue into compensation decisions.

But this rosy picture darkened as the research further showed that while almost all companies incorporated ESG issues in short-term compensation plans, only 16 per cent linked these issues to long-term incentives.

The study confirms that considerable work needs to be done in terms of developing robust approaches linking ESG performance and outcomes to executive pay.

Furthermore, the study revealed that the performance metrics used by companies are often obscure, ill defined, or simply fail to capture a company’s most critical ESG challenges.

*‘Integrating ESG issues into executive pay – a review of global utility and extractive companies’