As sustainability issues become more common in the boardroom and the volume of shareholder proposals related to those issues grows, the link between corporate sustainability performance and executive compensation is expected to become more important, according to the latest Director Notes report from The Conference Board.
Interest has grown among shareholders in recent years about the inclusion of sustainability performance as part of the compensation formula, notes the report, “Linking Executive Compensation to Sustainability Performance.” The growing value that shareholders are placing on long-term performance and corporate sustainability serves as an indicator for directors that nonfinancial performance may become a more prominent topic in future proxy seasons.
“Today the vast majority of executive compensation schemes are based almost exclusively on companies’ financial performance, rarely taking into account performance on increasingly important environmental and social issues,” says Thomas Singer, a research associate at The Conference Board and author of the report. “However, we are seeing a gradual shift toward a notion of performance assessment that incorporates nonfinancial elements, and there are a few leading companies that offer great examples of what this looks like in practice. The growing importance of sustainability in the boardroom means we can expect nonfinancial performance to play a greater role in future executive compensation schemes.”
The report discusses corporate directors’ increasing interest in sustainability matters, progress being made toward a notion of performance assessment that incorporates nonfinancial elements and efforts by some companies to explain how they link incentive awards to sustainability targets in response to shareholder proposals on this topic. “Linking Executive Compensation to Sustainability Performance” provides data on and examples of companies that are already tying executive compensation to sustainability performance. It also highlights the challenges involved in creating a compensation framework that incorporates sustainability performance, and provides data and voting results for shareholder proposals linking sustainability performance to executive compensation since 2009, and board responses to such proposals.
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