We wanted to report on a trend we’ve been observing in the world of shareholder engagements. More and more we are seeing corporations being pressed to tie executive compensation to social goals, as opposed to just financial objectives. Corporations need to benefit society, not just shareholders.
Re-working the C-suite incentive structure to include important goals like workforce diversity/inclusion, employee development and worker health may bring more momentum to corporate responsibility.
In the past few years, corporations have made new commitments to diversity/inclusion and support for employees of all backgrounds. Now, more companies are putting money behind those pledges by tying executive compensation to specific goals. Companies like Starbucks, McDonald’s, Nike and Microsoft have already linked these together.
Gary Gensler, head of the SEC, recently made an announcement saying, “Investors want to better understand one of the most critical assets of a company: its people.” He hinted that SEC staff would propose recommendations for what human capital disclosures they’d want to see from large corporations. This included metrics such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety. Furthermore, there is also a financial case for these metrics – improving them increases a company’s ability to attract and retain talent, win market share, and drive innovation.
Some companies we work with like Trillium Asset Management and Parnassus are fighting hard on these initiatives, pressing companies like United Natural Foods (main supplier to Whole Foods), Booking Holdings (parent company of Priceline, OpenTable and Kayak.com), and Alphabet (parent company of Google) to re-work executive compensation.
An increasing number of shareholders are beginning to appreciate the potential impact executive compensation structures that include ESG (environmental, social and governance) metrics can have on corporate sustainability. Currently, about 100 S&P 500 companies link a portion of short-term incentives for CEOs (i.e. annual cash bonuses) to ESG metrics, up from roughly 68 in 2020. Setting aside funds that hold executives accountable for making progress on their corporate responsibility goals also makes sense for the business, and we believe this positive trend will continue.