The COVID-19 pandemic and racial justice movement will likely accelerate ESG and I&D trends within executive compensation through 2021 and beyond. Investors and various stakeholders are likely to continue to pressure companies to demonstrate meaningful performance on building an inclusive and diverse employee base and leadership. Boards are likely to consider stronger ties between executive compensation and long-term improvements to I&D.
A top priority among HR Policy members is whether to tie inclusion and diversity metrics to executive pay. Despite the various methods companies use to improve diversity and reduce risks tied to environmental factors, a set standard for using D&I or ESG in compensation programs does not yet exist. This lack of standard has made it challenging to determine how many companies are utilizing various metrics in their compensation plans.
While 56% of the largest US companies highlight ESG in their incentive structure, it is not evenly distributed across industries, nor is it always tied directly to payouts.
- ESG metrics remain largely qualitative. Of the 132 companies that use a metric in some form, 22% use a formulaic method. The remainder use ESG metrics within an individual modifier or team-wide scorecard.
- The most common ESG metrics are Human Capital & Culture (43%) and Inclusion & Diversity (31%), but they are rarely used as independent metrics.
- Only 10% of companies using ESG metrics disclose a quantitative performance element for Human Capital & Culture and 18% do so for Inclusion & Diversity.
As with all surveys of this type, we advise caution when reviewing results due to the difficulties inherent in analyzing disclosures for ESG metrics, especially diversity and inclusion metrics.
The focus on these range of issues, which has dominated our discussions with Center Subscribers (along with responses to the pandemic), is not likely to diminish in 2021. Challenges remain in deciding specifically what should be measured and whether E&S results should be prioritized over financial results. Best practices for transitioning from short-term increases in diverse hiring to long-term, sustainable inclusive workforces are still being developed.
The results of the 2020 election provide the Biden administration with options. Given the election results from Georgia, several legislative and regulatory avenues have opened. It is likely that Democratic members will use the Congressional Review Act (CRA) to roll back relatively recent rulemaking. This includes the SEC’s rules on proxy advisory firms, the rules on shareholder proposal eligibility, and the rules on principles-based human capital disclosures. Additionally, the Biden administration and Congressional Democrats will have an easier time approving nominees and spending measures. Some spending legislation, such as the CARES Act, could carry provisions restricting certain elements of compensation or the use dividends and share buybacks. However, legislation that does not deal with spending will be more challenging. With a 50-50 Senate split, Democrats would need to ensure all members support any major legislative effort but even then, Republicans could use the filibuster.
Until a Biden administration appointee is confirmed, it is unlikely the SEC will undertake significant rulemaking. Former SEC Chairman Jay Clayton formally stepped down as Chairman on Dec. 31, 2020. Meanwhile, four candidates have emerged as likely nominees: former Obama administration Commodity Futures Trading Commission Chair Gary Gensler, NYU law professor Robert Jackson Jr., former U.S. Attorney Preet Bharara, and former Federal Reserve vice chairman Roger Ferguson, CEO of TIAA. Once an appointee has been confirmed, an active period of rulemaking could commence, including finalizing the remaining provisions of Dodd-Frank and further requirements for human capital disclosures including gender and ethnicity statistics as well as pay disparities.