An increasing number of blue-chip companies in Australia are expected to include environmental, social, and governance (ESG) metrics in executives’ long-term incentive plans this year, according to remuneration experts. The move follows increasing shareholder pressure to take action on climate change, diversity, governance, and customer advocacy. Last year, only six ASX 200 companies required executives to achieve environmental targets for their long-term bonuses, but this is expected to double this year, with banks, resources, and energy companies driving the change. The Australian Prudential Regulation Authority’s new requirement that big financial institutions give “material weight” to non-financial measures will also be a driving factor.
Philip Foo, of CGI Glass Lewis, stated that the firm’s general approach is to support non-financial metrics in long-term incentive plans when they are introduced and judge their suitability when bonuses are eventually paid out. However, some investors remain skeptical, citing issues of trust and the difficulty of linking bonuses to project milestones, while others believe that such metrics are less quantifiable and part of an executive’s regular job. Elizabeth Sheedy, a risk governance expert, believes that assessing performance is difficult and requires judgment, while common measures such as employee engagement and customer satisfaction can be manipulated.
Some companies are expected to adopt a balanced scorecard approach when it comes to non-financial metrics, which some investors and advisors say is problematic. Nonetheless, many companies are likely to adopt non-financial hurdles, including environmental hurdles, into long-term incentive plans. For example, last year mining group South32 overhauled its incentive framework, linking 10% of executives’ long-term pay to performance against a set of climate change measures, with another 10% linked to transitioning the portfolio towards base metals that reduce carbon emissions. Similarly, AMP introduced a non-financial target in the long-term incentive plan of CEO Alexis George, with 30% of her long-term bonus linked to AMP’s reputation. However, proxy adviser ISS has taken issue with the arrangement and urged AMP shareholders to vote against granting performance rights to George in the form of equity.
