ESG Incentive Metrics - S&P 500 Highlights Willis Towers Watson's Global Executive Compensation Analysis Team
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ESG Incentive Metrics S&P 500 Highlights Willis Towers Watson’s Global Executive Compensation Analysis Team March 2020 willistowerswatson.com © 2020 Willis Towers Watson. All rights reserved.
Key findings
S&P 500 Use of ESG Metrics
Overall
Prevalence
51%
Incorporate ESG
50%
Include ESG metrics
4%Include ESG metrics
metrics in their in annual incentive in long-term incentive
incentive plans programs programs
How ESG measures are
incorporated into annual
49%
incentive programs
35% 32%
The typical weighting of all ESG
metrics (some companies use
multiple ESG metrics) is 18%, but
range from 5% to 40% of AIP
measures
Weighted metric Qualitative Individual
component component
willistowerswatson.com 2
© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.ESG incentive design features
Several approaches allow ESG measures to impact incentive payouts
Design feature Feature description Feature example
Funding formula components
The defined incentive metric makes up a 10% of the annual bonus formula is based on developing
proportion of the annual bonus payout formula. organizational capacity, which includes employees and
Weighted metric Payouts are generally made in a range around culture, facilities, and business continuity management.
target (e.g. 50-200%) depending on observed Employees and culture includes implementing an employee
performance against pre-set target requirements. survey and ensure actions to ensure retention
A portion of the incentive payout formula is based
Strategic performance is 30% of the overall AIP formula.
on a category of operational or strategic
Qualitative strategic Human Capital Management – employee engagement,
measures that are bundled and evaluated
measure retention and leadership effectiveness – is evaluated as part
together. Performance and payouts against the
of the strategic performance component.
measures are applied equally to all participants
The key individual goals for the CHRO relate to overseeing,
Payouts are based on a subjective evaluation of
supporting and implementing human capital development
Individual evaluation individual performance. Performance and payouts
and strategic plans, succession planning, compensation
vary by individual participants
matters, and social responsibility matters
Payout formula modifiers
Adjustments made to incentive payouts based on Final bonus payouts for Named Executive Officers were
a determination by the compensation committee adjusted downward by the compensation committee to reflect
Discretionary adjustment
or board outside the established incentive design required improvements to customer service policies and
parameters, usually to account for atypical events procedures in connection with a specific customer incident
A provision that permits modification to the Annual bonus payments may be reduced by up to 50% if
Payout modifier incentive payout for atypical situations that is built they engage in behavior inconsistent with discrimination and
into the design program up front. harassment policies
A performance hurdle that must be achieved Annual incentives are earned 75% based on achieving
Circuit breaker before any incentive earned under the payout EBITDA goals and 25% based on achieving strategic goals,
formula can be received subject to first achieving a gating level of safety goals
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© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.How ESG metrics fit into incentive program funding formula designs
Customer service, Environmental & Sustainability and Safety are more commonly
defined as weighted metrics while Governance and HR-related metrics are
usually factored into individual performance evaluations
People & HR 5% 7% 20%
Customer Service 9% 5% 7%
Diversity & Inclusion 3% 6% 9%
44% of S&P 500
Employee Health & Safety
companies include
8% 6% 2%
Human Capital
measurements in
Governance 1% 3% 10% their incentive
plans
Environmental & Sustainability 6% 3% 5%
0% 5% 10% 15% 20% 25% 30% 35%
Weighted metric Qualitative component Individual component
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© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.ESG performance weightings
Most common (mode) annual bonus weightings and examples of quantitative
measurement factors used in annual bonus plans
Environmental &
Customer Service: 10% Diversity & Inclusion: 5% Sustainability: 10%
Customer satisfaction survey results Improvement in female and minority Annual progress toward long-term
First call resolution representation rates in the employee emissions goal
Net promoter score population
Meet waste reduction targets
On-time delivery/departures Inclusion survey scoring improvement Reportable environmental events limits
Patient waiting time Increase minority and women Reduce carbon intensity
representation at management levels
Quality of service Women and minority new hire and Reduce greenhouse gas emissions
Redefining the customer experience promotion target rates
Employee Health &
People & HR: 10% Safety: 10% Governance: 10%
Automation and digitization goals (future of Days Away, Restricted or Transfer (DART) Stakeholder engagement targets
work)
Leadership site visits and observations Compliance achievement
Culture survey results
Lost time injury rate (LTIR) Continuity plan completion
Employee engagement survey results
Reduce workplace incidents Broad ESG factors
Health of workforce (matrix) score
Safety audit goals
High performer retention rates
Serious incidents or fatalities (SIF) rate
Voluntary turnover targets
Total recordable incident rate (TRIR)
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© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.Annual incentive ESG metric payouts versus targets
Nearly 70% of weighted ESG annual incentive metrics paid out at target or above
All ESG Metrics 31% 8% 61%
Customer Service 43% 7% 50%
Diversity & Inclusion 25% 8% 67%
Employee Health & Safety 33% 0% 67%
Environmental & Sustainability 22% 7% 71%
Governance 0% 25% 75%
People & HR 26% 22% 52%
Below target Target payout Above target
* Findings are based on payouts for 147 weighted metrics among 80 S&P 500 companies. Sample sizes for each of the ESG categories are: Customer Service: 42,
Diversity & Inclusion: 12, Employee Health & Safety: 39, Environmental & Sustainability: 27, Governance: 4, and People & HR: 23.
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© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.A finer look at the People & Human Resources category
32% of companies using ESG metrics feature People/HR issues and succession
and talent management is the focus for the majority
Other, 5%
Culture: 17%
Succession &
talent
development:
55%
Employee
engagement: 23%
* Other includes wellness, future of work and implementation of HCM programs. Companies may utilize several of these People/HR categories.
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© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.Use of ESG metrics by GICS industry sector
90%
83%
64%
59% 59%
55% 54% 56%
S&P 500: 51%
39%
34%
30%
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© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.ESG metrics are not commonly included in long-term incentive programs
Just 21 (4%) S&P 500 companies use ESG metrics to determine long-term
incentive awards in the following design structures and ESG categories
Customer Service
8 Grant size
modifier: 5
Diversity & Inclusion 4
Environmental & Sustainability 7
People & HR 7
Weighted Payout modifier:
Employee Health & Safety 7 formula factor: 5
11
Governance 2
Design feature Feature description Feature example
Provision that adjusts the established market or
The board awarded the COO 120% of her equity target as a
position level grant based on achieving a desired
Grant size modifier result of significant improvements made by the company as part
outcome. Performance against other metrics
of its quality and safety programs.
eventually determines the final payout
The defined incentive metric makes up a proportion of
the annual bonus payout formula. Payouts are
Payout of the award is based 10% on achieving greenhouse gas
Weighted formula factor generally made in a range around target (e.g. 50-
reduction goals over the 3-year performance measurement cycle
200%) depending on observed performance against
pre-set target requirements.
A diversity modifier can impact the payout of performance
A provision that adjust the payout of a performance
awards by +/-10% based on whether there was improvement in
Payout modifier award based on metrics and performance outside of
representation of diverse persons in senior management by five
the features used for the primary award
percentage points over 2018 through 2020 performance period
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© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.You can also read
