Executive Compensation 2021: Back to the Future

by Robin Ferracone

Welcome to 2021. The first two weeks of January have certainly foreshadowed an eventful year to come. To ring in the New Year, Farient and our partners in the Global Governance and Executive Compensation Group (GECN Group) just published our newest research entitled 2021 and Beyond: Global Trends in Stakeholder Incentives. Clearly, as we look in the rear view mirror and anticipate the future, nothing continues to gain more traction than stakeholder prominence. To that end, this year’s Farient/GECN Group research, the fourth in our series, focuses on the increasing use of stakeholder metrics in executive pay plans globally.

We all know that talk is cheap, but walking the talk never goes out of style. With COVID-19, civil unrest, and divisive politics circling, corporate executives and boards of directors continue to step up to address all areas of environmental, social, and governance (ESG) concerns that impact their employees, customers, suppliers, and the communities in which they operate. Almost overnight, companies have evolved from a shareholder to a stakeholder mindset. (While I acknowledge that ESG is the most frequently used moniker for interests that extend beyond “shareholders”, I do not feel as though ESG captures the full breadth of non-financial interests that also include customers and communities. As a result, I have used the term “stakeholder” to refer to ESG, customer, and community interests, apart from shareholders, in this discussion.)

To truly gain insight into how stakeholder incentives are shaping executive pay, our global team analyzed more than 500 public companies across six regions, and interviewed directors, investors and ESG ratings experts. The findings from this research are timely, since we expect that executive pay, corporate governance, diversity and sustainability likely will be a major focus of the new Congress and Administration in 2021.

But, it’s not only about regulatory concerns. COVID-19 continues to accentuate the need to consider broader stakeholder issues and has accelerated the pace at which companies are doing so. As a result of our study, we found that companies in North America, Continental Europe, the United Kingdom, Australia, and Singapore are communicating the importance of culture; diversity, equity, and inclusion (DEI); and financial, physical, and emotional well-being.

Not surprising, significant findings from our study were echoed by many of our clients. A sampling of findings include:

• Companies are following their own compass. They, themselves, are driving the quest for stakeholder value. They are not  doing so only in response to external forces, such as investors, proxy advisors, environmental activists, unions, or regulators

• There are three dimensions to stakeholder measures.  These are: Strategy and Culture, Measurement and Reporting, and Incentives and other Pay Levers. Each company will approach these dimensions differently, coming to different solutions that they deem appropriate for their business. However, regional norms and culture and industry sector also have a significant influence on approach

• Use of stakeholder measures in incentive plans is significant. 67% of companies in the regions we studied now use stakeholder measures in their incentive plans. While most of these measures populate short-term incentive plans, stakeholder measures are now starting to appear in long-term incentives as well

• The prevalence of stakeholder measures in incentives differs significantly by region. Australia leads in the use of stakeholder measures in incentives with an 81% prevalence, whereas the U.S. lags Australia and Europe at 56%

• The prevalence of stakeholder measures in incentives differs significantly by industry sector. Utilities, Financial Services, Energy, and Materials companies are the most frequent users of stakeholder measures, whereas Information Technology and Consumer Discretionary companies are the least frequent users of stakeholder measures

• Among stakeholder measures in incentives, Social measures are the most prevalent.  Social measures are used by 61% of the companies we studied, followed by Customer (37%), Governance (32%), Environmental (25%) and Community (10%)
  • Within the Social category, Employee engagement, Diversity, Equity, and Inclusion (DEI), and Health and Safety are the most frequently used measures
  • Within the Customer category, Customer Satisfaction is the most frequently used measure

Regardless of a company’s specific approach, our global experience highlights the critical role boards of directors play in overseeing stakeholder policies, including developing the strategy, monitoring the culture, crafting the message, and ensuring that executive and stakeholder interests are aligned.

If you haven’t had an opportunity to review the research, please follow the link below and I’d love to know your thoughts.