Key Findings

  • Nearly two-thirds (58%) of companies in the S&P 1500 index, which covers about 90% of the U.S. market capitalization, have incorporated ESG factors into CEO performance metrics, up from just 23% in 2019, according to global insurance brokerage and consulting firm WTW, which told reporters on Tuesday.
  • Alex Ha, WTW's director of executive compensation and board consulting, noted that while the use of other non-financial strategic metrics has declined, the use of ESG has experienced more "dramatic growth." He said that when companies include ESG in annual incentive plans, it typically replaces other non-financial metrics, which have historically accounted for no more than 20% of such strategies.
  • According to WTW's research, about 7% of S&P 500 companies introduced or added new ESG metrics to their incentive plans, while 5% modified how such metrics are used. Modifications include adjusting metric weights, revising environmental, social, and governance goals, or removing these goals entirely from incentive plans.

Deeper Insights

The Anglo-American insurance services provider, formerly known as Willis Towers Watson, reported during a webinar that executive compensation increased by a modest 3% year-over-year in 2023, while actual bonuses earned decreased by 6.4%. According to WTW data, total actual compensation also grew by 4.5% in 2023.

Despite the increased use of ESG metrics in executive performance benchmarks, Ha said that ESG has not seen broader adoption overall, due to last year's Supreme Court ruling on affirmative action and scrutiny of the legality of diversity, equity, and inclusion (DEI) programs.

However, WTW's executive compensation consultants said that linking climate goals to executive incentive plans still enjoys strong support. Kenneth Kuk, a senior director at WTW, said that among U.S. S&P 500 companies, the proportion with some form of climate metric in their incentive plans has jumped to nearly 45% this year, up from just 14% three years ago.

Kuk noted that ESG faces some resistance in the U.S., but companies with global operations face pressure from European investors and consumers to fulfill sustainability commitments.

Diversity, Equity, and Inclusion (DEI)

Although the Supreme Court's affirmative action ruling affects university admissions, WTW's consultants noted that following it, U.S. companies with DEI programs may face litigation risk.

Kuk believes that risk is highest when there are representation quotas or numerical targets for demographic groups.

"Organizations must have the right infrastructure in place to ensure they can demonstrate... that DEI programs are designed to eliminate bias rather than introduce bias," Kuk said. He noted that executive compensation plans containing representation targets may face litigation risk.

However, the level of risk is related to the overall alignment of DEI with a company's business strategy, said Becky Huddleston, managing director and co-leader of WTW's executive compensation and board consulting business.

"Some companies are sticking with their original approach and not changing how DEI is included in incentive plans, which means continuing to use quantitative metrics for some companies and qualitative metrics for others," she said. Huddleston noted that some companies have removed the metric entirely, indicating that DEI has been "integrated into their culture," so it no longer needs to be included as an incentive plan metric.

She added that other companies are in a middle state, still including DEI in incentive plans but shifting from quantitative to qualitative goals, or modifying metrics to reflect broader outcomes.

Complying with Climate Disclosure Rules

Although the U.S. Securities and Exchange Commission's (SEC) climate disclosure rules are paused due to legal challenges, WTW still recommends that companies continue planning and preparation efforts to comply with climate disclosure laws and regulations, especially as the European Union's Corporate Sustainability Reporting Directive (CSRD) and California climate laws take effect.

"California climate laws require assessment of climate risks, as well as Scope 1, Scope 2, and Scope 3 emissions reporting; finally, the EU's CSRD affects approximately 50,000 listed and non-listed companies, and although it is an EU directive, it impacts about 3,000 companies operating in the U.S.," said Holly Teal, WTW's North America climate practice leader.

She added that companies also need to ensure they have adequate board oversight frameworks to meet the requirements of these laws and regulations.

"Although challenging, given the inconsistencies of these regulations, the board's role in overseeing and being responsible for assessing, managing, and integrating material climate risks and opportunities is even more important," Teal said.