More executives are having their pay measured by non-financial performance including emissions reduction and diversity initiatives
Canada’s second largest pension fund has an ambitious goal for a net-zero portfolio by 2050, and plans to get there in part through its practice of linking its employee pay to sustainability performance.
When Ms. Strandberg did a review in 2013 of the 60 large companies listed on the Toronto Stock Exchange, known as the S&P/TSX 60, she found 40 per cent had ESG-linked pay incentives. Today, she says that number is about two-thirds. About 70 per cent of companies on the S&P 500, which includes the largest 500 large companies listed on exchanges in the United States, link executive pay to ESG performance.
ESG-linked pay incentives are also relatively new and will evolve over time, Ms. Strandberg adds. Company executives and board members will need to determine more specific targets, related to their business and industry, to reach their unique goals, she says. Compensation is a sensitive topic and the success of the incentive program required buy-in from all employees, he says. A change-management strategy, which included meeting with employees to receive their input, was crucial to success, he adds.
And while the trend is headed in the right direction, Mr. Heaps believes not enough companies are transparent about the percentage of pay that is linked and the precise nature of the sustainability targets. One of the main challenges for companies in linking compensation incentives to ESG performance is the long-term nature of social change and climate goals within the short-term nature of Canada’s tax regime, says Don Begun, a partner at Osler, Hoskin and Harcourt LLP. based in Toronto.
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